Our customers’ energy bills are made up of various different costs, from the fuel we use, to mandatory government energy efficiency programmes, investing in the electricity network and lower carbon generation and the cost of transporting energy to customers’ homes.
The diagram below shows where the money goes for every £100 that a customer spends with us, across the whole electricity supply chain from electricity generation, through transmission and distribution to supply.
Key Elements of a Domestic Customer’s Bill
The section below shows how our Energy Retail business allocates the income from a typical customer bill – the cost of electricity and gas makes up just over half of this bill.
Wholesale energy costs
This is the basic cost of the energy itself – known as the wholesale energy cost. We purchase energy in advance to make sure we can meet customer demand. Buying in advance also helps us to ensure sufficient supplies of energy and smooth out what customers pay, as wholesale costs can be highly variable from day to day.
Delivering the energy to homes
This is the cost of transporting energy to customers’ homes through the network of wires and pipes that covers the country. For every unit of energy used by a customer, we pay a fee to the company who owns the pipes or wires that connect to customers’ homes. These fees, which are effectively a “delivery charge” for energy, are agreed with the industry regulator Ofgem.
Maintaining energy accounts
This includes the cost of reading meters, printing and posting bills, maintaining call centres to answer customer enquiries and collecting money from our customers. It also includes the normal profit we make as a company.
VAT & government obligations
As well as the standard VAT charge, which is 5% for domestic energy, the Government has introduced several obligations that all energy suppliers are required to deliver. These are explained in more detail, below.
Government Obligations include the Renewables Obligation and the Carbon Emissions Reduction Target (CERT).
Under the Renewables Obligation all major UK energy suppliers are required to obtain a specific percentage of the electricity they sell to customers from renewable sources, such as wind power. The cost of meeting this obligation is included in the price of electricity.
Social Initiatives
UK energy suppliers have agreed that they will increase spend to £150 million in 2010/11 on a range of social programmes to assist vulnerable and fuel poor customers.
In addition, the Community Energy Savings Programme (CESP) obliges suppliers and generators to pay for the installation of energy efficiency measures in the homes of people living in areas of social deprivation.
The objective of the programme is to permanently reduce fuel bills for vulnerable customers on low incomes and to reduce CO2 emissions. It is estimated that this programme will cost the energy industry £350 million over three years. We include an allowance for the cost of meeting this objective in our energy prices.
The Carbon Emissions Reduction Target (CERT) is the main government policy aimed at reducing carbon emissions by improving the energy efficiency of UK households. It obliges all of the UK’s major energy suppliers to deliver energy efficiency measures like loft and cavity wall insulation to homes across the UK.
Many of these measures are discounted and in some cases are provided free of charge. It is estimated that the cost to the energy industry of delivering this policy will be £5.5 billion from April 2008 to December 2012. Like other energy companies we include an allowance for the cost of meeting this objective in our energy prices.
For further information on products and prices, please see our customer website: www.scottishpower.co.uk
