How is your energy bill calculated?

Published:
02 September 2013
Topic:
News,Gas & Electricity

Energy bills are a bit baffling, aren't they? Full of numbers and jargon - it's enough to leave you wondering what it all means, and even whether you're paying the right amount for your gas and electricity.

The good news is, with the introduction of the Retail Market Review, industry regulator Ofgem is making all energy suppliers simplify their tariffs by the end of this year. This means they'll only be able to offer a maximum of four core tariffs for each type of fuel. And by the spring next year, they'll have to go a stage further by informing their customers of their cheapest deals on the market.

However, as energy suppliers are at different stages of being 'RMR-ready' householders are still largely left baffled. We take a look at the basics of how your energy bills are calculated.

What makes up your bill?

The amount you owe for your energy at the end of each billing period is calculated from a combination of the following elements:

• How much energy you've used multiplied by the unit cost of energy

• Standing charges

• VAT

• Discounts

Here's how each works.

Energy usage

This doesn't really need an explanation - though it's always good to use less. You can find out how with our energy saving tips.

Unit rates

This is the price (in pence) of your gas or electricity, per kilowatt hour (kWh). The cost per unit differs for gas and electricity, with electricity costing considerably more. It used to be the case that you'd be charged a higher price for the first tranche of units used and a lower price after a certain threshold, known as 'two-tier pricing'. But the RMR has banned this practice and energy suppliers are phasing it out.

Of course, unit prices still vary between suppliers but, like standing charges, they also vary between region and payment method, which makes it extremely tricky for consumers to compare prices for their energy.

EDF Energy has joined forces with consumer group Which? to campaign for one national unit rate for gas and electricity for each tariff - and for the abolition of standing charges to enable 'at a glance' comparison of prices. Other suppliers including British Gas however, oppose the idea and claim that setting the same standing charge for gas and electricity could see some more vulnerable customers paying more.

Standing charges

These are fixed amounts charged by your supplier for being connected to the gas and electricity network and for servicing your account - they don't relate to how much energy you use. Most energy suppliers charge these fees at a daily rate. Some however, will calculate them annually. Standing charges can vary based on which tariff you are on, the region you live in and how you choose to pay your bills.

VAT

The standard rate of VAT on the goods and services we buy is 20% but, thankfully, we pay a reduced rate of 5% on energy. This is also added onto our bills.

Discounts

As an incentive to get your custom and be paid in the way they'd like, energy suppliers offer discounts to customers on their bills. The most common discounts are for your purchase of both your gas and electricity (known as 'dual fuel'), paying by direct debit (because it means you won't miss a payment), and managing your account online (as it saves the supplier in administration costs).

While a dual fuel discount sounds attractive, it might not be the cheapest option. Getting single fuels from different providers could cost less - although you may find the convenience of having a single supplier, with one bill and one payment to make, is worth the additional cost.

How do the 'big six' (and other) suppliers charge?

Here's what and how the big six suppliers - namely; British Gas, SSE, EF Energy, E.On, Scottish Power and npower - charge for their energy, based on average consumption and standard tariffs. We've also thrown in a couple of alternative suppliers for context and good measure.

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British Gas

British Gas is the biggest energy supplier in the UK, with a mammoth 10 million customers.

Its standing charges will depend on the tariff and the payment method you opt for. Taking the supplier's Clear and Simple tariff as an example, the standing charge is £148 a year if you pay by monthly direct debit - but £157 a year if you pay on receipt of your bill. These costs apply to dual fuel.

When it comes to unit prices, British Gas no longer has tariffs available on the market that are based on two-tier pricing. In other words, their cost doesn't hinge on the amount of energy you use.

However, unit prices WILL depend on your region and how you choose to pay. The average charge however (again, based on the Clear and Simple tariff), is 4.5p per kWh of gas, and 13.426p per kWh of electricity.

In terms of discounts, you'll get a straight £15 a year off for taking dual fuel across all British Gas tariffs, 6% off for paying by direct debit, while managing your account online will land you with another 4% off standard rates.

Average cost of standard tariff a year: £1,326

Average cost of cheapest tariff a year: £1,299 (Fixed Price May 2014 tariff)

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SSE (Scottish and Southern Energy)

SSE also levies its standing charges annually, rather than daily - which at least makes things simple as customers will be charged £100 per fuel, per year.

While SSE has also now scrapped two-tier pricing, unit rates will continue to vary according to your tariff, method of payment and the region you live in.

For example, someone living in Chester on SSE's Standard Energy tariff paying by direct debit, will pay 14.46p per kWh of electricity and 4.30p per kWh of gas. But a customer on exactly the same tariff in Lambeth, London will pay 13.08p and 4.44p per day respectively.

Discounts offered by SSE are pretty decent, though. In return for paying by monthly direct debit, you'll get £40 a year off your bill, while opting for online billing will shave off another £6 a year. Both discounts will be deducted from your annual standing charge.

Average cost of standard tariff a year: £1,354

Average cost of cheapest tariff a year: £1,262 (The 1 Year Fixed Price Plan)

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Scottish Power

Scottish Power levies standing charges on a daily basis - at 27.39p a day for each fuel (if you're on a standard tariff and you opt for monthly direct debit). But, unlike most the standing charges, Scottish Power's do not vary by region. So, a customer in London will pay the same standing charge as a customer in Glasgow or Liverpool (providing they are on the same payment method and tariff).

Again, unit prices - also no longer based on the two-tier structure - will vary according to region, method of payment and tariff. As an example, customers living in the Eastern region of the UK will pay 12.99p for each kWh of electricity, and 4.009p for each kWh of gas.

When it comes to getting money off, Scottish Power offers a straightforward £5 a year (per fuel) in return for managing your account online. If you take both gas and electricity from the supplier, you'll receive another £5 off the annual cost for each energy type and, if you cough up your bill within 14 days of issue, you'll also get a Prompt Payer discount on your standing charge of just over 4p per fuel, per day.

Average cost of standard tariff a year: £1,368

Average cost of cheapest tariff a year: £1,195

(The Online Fixed Price Energy November 2014)

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EDF Energy

Standing charges, again, are levied daily when it comes to French State-owned energy supplier EDF Energy. It offers the same daily standing charge of 18.9p per day for electricity and 26.25p per day for gas to EVERY customer regardless of their tariff, meter types and region they live.

Unit rates for gas and electricity however, will still vary with EDF Energy according to region and tariff. As an example, a customer living in the South West, will pay 18.03p per kWh of electricity and 4.24p per kWh of gas.

The good news is, if you find your tariff too expensive, EDF Energy won't charge you an exit penalty on any of its variable tariffs or on its Blue+Price Promise December 2014 and Blue+Price Freeeeze November 2016 fixed rate tariffs - so you can jump ship whenever you want to.

Discounts are also available with the supplier. If you opt to pay by monthly direct debit, you'll get up to 6% off the cost of your annual bill, while taking both fuel types from the supplier will secure a further £8.40 discount each year.

Average cost of standard tariff a year: £1,252

Average cost of standard tariff a year: £1,210 (Blue +Price Promise December 2014. You can read more about this tariff with Jessica Bown's article).

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E.On

E.On, an energy supplier which accounts for around five million UK customers, levies standing charges of 27.395p on a daily basis for both gas and electricity - based on the supplier's standard energy plan.

When it comes to unit rates, costs will vary. However, on its standard tariff, electricity will cost 13.789 per kWh, while gas will cost 4.334 per kWh. In keeping with its competitors, all available tariffs from E.On will now be charged on a single rate structure.

Discounts on these costs are available for the taking though. Again, on its standard energy plan, the supplier offers a 3% 'prompt payment' discount for customers paying quarterly by cash or cheque but, if you pay by direct debt - which ensures payment will be prompt - you'll get a deeper discount of 6%. Customers will also get an extra 2% off for taking dual fuel with E.On.

Average cost of standard tariff per year: £1,328

Average cost of cheapest tariff per year: £1,221 (Fixed 1 Year v4 tariff)

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npower

npower's standing charges currently work in two ways. Its standing charge for electricity is charged annually at £40, while gas is charged on a daily basis at a rate of 40p per day. However, the supplier says it's in the process of unifying this charging structure.

While there's no two-tier pricing anymore for unit prices of gas and electricity at npower, the cost will vary by tariff and region. As an example, someone living in Manchester will pay 15p for kWh for gas and 3.8p for each kWh of electricity.

Discounts are pretty good with npower - you'll get £50 a year off the cost of gas and £40 a year off the cost of electricity just for choosing to pay by direct debit. This reduction will be applied daily however, and deducted from your standing charge. Effectively then, the standing charge for your electricity, could end up being free.

Average cost of standard tariff a year: £1,352

Average cost of cheapest tariff a year: £1,180 (Online Fix October 2014 tariff)

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First Utility

First Utility, which launched in 2008 and is now the largest independent energy supplier, varies its standing charges according to region and charges daily. The average cost taken across four of its most popular tariffs is 22.77p a day for electricity, and 23.85p a day for gas.

Like standing charges, unit rates will also vary with region and tariff. As a benchmark though, on its basic iSave v16 tariff, the average cost will be 11.989p per kWh of electricity and 3.588p per kWh of gas. In keeping with its competitors, First Utility has scrapped two-tier pricing, so customers will not apply additional costs for the volume of usage.

Discounts for dual fuel tariffs are a thing of the past with First Utility, however. In the supplier's own words: "In the interests of simplicity we now don't offer any specific discounts - just the most competitive overall prices." Other suppliers make the same claim though so make sure you shop around on MoneySuperMarket's energy channel rather than taking their word for it.

Average cost of standard tariff a year: £1,250

Average cost of cheapest a year: £1,155 (The iSave v16)

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The Co-operative Energy

Recent arrival to the energy market in 2010, the Co-operative Energy is owned by its customers rather than shareholders which, theoretically at least, means that you will benefit from their profits via your bills. Environmentally conscious householders may also take comfort in the Co-operative's aims for the carbon content of its electricity to be 50% of the national average.

The Co-operative Energy is also one of the most transparent energy providers. It has one annual standing charge (though it's payable quarterly) which is £73 for both gas and electricity - across all regions.

And these days the Co-op only offers one (variable rate) tariff too, called Pioneer, although the attached unit prices for both gas and electricity will still vary depending on where you live. As an example, customers living in the North East will pay 12.53 per kWh of electricity and 4.19p per kWh of gas.

While being simple and transparent is a good thing, it also means the supplier doesn't offer discounts.

Average cost of Pioneer tariff each year: £1,255

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Time to switch

With the introduction of the RMR, things might be simpler by the end of the year when it comes to getting the best energy deal - but they won't necessarily get cheaper. So using our energy comparison table and shopping around for the best deal is just as imperative.

It's really not difficult either, as you will see from our step-by-step guide on how to compare and switch. And with savings up to £250 a year on offer you've nothing to lose and everything to gain.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct

* Up to 10% can save at least £244.64, MoneySupermarket data based on sales. June 2013

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Mark Hooson

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