Why our energy bills are so high

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Energy suppliers may defend extortionate prices with talk of wholesale energy prices and the Government's green policies, what does it really mean for the size of our bills?

We asked Andrew Horstead, a risk analyst and energy and carbon management specialist at Utilyx, to demystify the driving forces behind our energy bills.


How do wholesale energy prices affect household energy bills?
Energy retailers such as British Gas buy energy for the wholesale prices. These prices are extremely volatile and constantly move up or down according to demand. Energy prices are seasonal and typically more expensive during winter when it reaches a peak in demand.

Also, due to Britain's dependency on imported energy, any event that impacts energy production or demand, such as natural disasters, political unrest or economic instability will have a corresponding impact on energy prices. Because of this volatility, suppliers often look to buy gas and power in advance of it being sold to customers.

If household tariffs were to follow the wholesale market exactly, then there would be some price 'lows' but the price 'peaks' would also be much more dramatic.

What affect will the government's green policies have on energy bills?
Consumers can expect their energy bills to rise to support the Government's push to "green" the UK energy sector and reduce carbon emissions. The Committee on Climate Change estimates that green policies will add £100 a year over the coming decade and will account for around 20% of the final bill compared to around 6% now.

The Government hopes that by implementing energy efficiency measures such as loft and cavity wall insulation, supported by the Government's Green Deal, consumers will reduce consumption as well as carbon emissions which will result in lower bills in the long run.

What other factors determine household energy bills?
There are a number of components that make up your energy bill. The cost of wholesale gas and electricity is the single largest component of any household energy bill, accounting for around 45%, but this is still less than half of a typical fuel bill.

Other costs include getting the power in to your home (roughly 19%), investment in energy efficiency and renewable energy (roughly 6%) while the remainder consists of operating costs, VAT and the suppliers' profit margin.

What is the outlook for energy bills in 2012?
Wholesale energy prices for this winter have dropped by around 25% since September, and the price of gas for delivery in Summer 2012 has dropped 15% over the same period. The sharp reduction is in response to mild weather this autumn, and the deteriorating economic conditions in the Eurozone, which has reduced industrial output and therefore demand.

In addition, unlike last year, the UK enters the winter period with plenty of gas in storage and lots of standby power generation capacity to meet peak winter demand. This winter is also projected to be warmer than last year which means we will use less gas and power to heat our homes.

Wholesale energy prices in 2012 will largely be dictated by the economy. It is expected that the Eurozone will experience a mild recession meaning industrial output will reduce and underlying demand will remain low. With energy supplies expected to be healthy, this should mean that wholesale energy prices will drop in the first half of the year especially if this winter is mild.

Depending on the size of the reduction, this could mean that energy bills will go down potentially around Easter. However, the more likely scenario is that energy bills will hold flat at current rates, delaying any price rises into 2013.

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