Clients often query why their utility bills don’t reduce by the same amount as falling gas or electricity prices. It’s a question we’re often asked and the answer is simple, the wholesale cost of energy, gas or electricity, comprises less than half of the overall utility bill.For a small business consumer only about 45% of a gas bill is made up of the actual cost of gas, in the case of electricity the percentage is lower, only about 35% of the electricity bill is electricity. All figures that follow are based on VAT inclusive bills.
There are several other elements that contribute to an energy bill which can be broken down into four main areas:
- Network costs
- Supplier operating costs
- Government costs
- Supplier Profit
These include all the costs to transport the energy from its source to its eventual point of consumption. These costs are charged to the supplier based on a format agreed by Ofgem. The relative proportion of a bill which is network costs is lower the more energy is consumed. These charges make up about 19% of gas bills and 23% of electricity bills to small business users.
Supplier operating costs
These account for approximately 12-12.5% of the overall energy bill and covers all of the supplier’s operational costs including billing management, customer service functions and cost of sales. It will also include any brokerage costs that have been included in your charges.
Approximately 19% of your gas bill and almost 24% of your electricity bill is paid by the supplier to the Government to cover environmental and social obligation charges, climate change levy and VAT.
The remaining 5% is supplier profit margin.
So a 35% drop in the wholesale cost of energy will only get you an overall reduction in your bills of about 19% on gas, or 14% on electricity (reduction in energy price plus the reduction in VAT levied as a result).