In my recent post on gas prices, I explained what affects the prices you pay for gas in your home. In this post, I will examine the price of electricity.
What causes my prices to go up?
We are all feeling it. The prices are going up, and our monthly bills are continually increasing. Most UK energy suppliers have either increased their prices since early Spring this year, or they are about to. What is causing the hike in households bills for electricity?
Although the mix of electricity on the market has changed over the past few years, with an increasing percentage coming from renewable energy such as biomass, solar, on- or off-shore wind, tidal energy etc., the country overall still relies on more carbon-intensive energy sources too, even though the government has gradually been closing down coal-fired electricity generating plants (following the EU’s Large Combustion Plant Directive; this ruling was since superseded by the Industrial Emissions Directive, issued January 1, 2016). These plants are being targeted to help reduce emissions in energy generation. This reduced production also has an impact on prices – they are going up, given there is less available. These price rises affect every supplier, even those who – like People’s Energy – are green electricity suppliers.
How are the prices of gas and electricity linked?
Besides, the price of gas and electricity are closely linked. Gas is used to produce electricity in turbines when there isn’t sufficient electricity coming from renewable sources. So, for example, if there is little wind and significant cloud cover or it is dark (i.e. no or little solar power), the country will need electricity from other sources. This pushes up the demand for gas, which in turn has a knock-on effect on the price of electricity. With a forecast of a continued increase in gas prices, the predicted price of electricity over the next year is therefore also significantly higher than normal. Energy suppliers that are unable to buy ahead (unlike People’s Energy) are much more vulnerable to the price changes and at greater risk of going out of business, particularly over the winter months, because of these prices.
Overall, the price of both gas and electricity is based on supply and demand. Apart from the availability of different types of generation sites and the conditions that affect production, political factors also have a direct impact on how accessible energy is for import, as does trade agreements etc. (spoiler: watch out for serious issues around energy prices, depending on how the UK government does in its negotiations with the EU over Brexit!).
How much of my bill is made up of the wholesale price of gas and electricity?
So, both gas and electricity bill prices are currently on a sharp rise. How much of my bill is made up of the actual price of gas and electricity on the market?
Recent data from Ofgem suggests that for the average household bill, from across all suppliers, the wholesale costs make up about 38%, while transport of the energy costs around 26%. Other factors that affect the price of your energy bill are environmental and social obligation fees (around 8%) (on average around 9%) and then the profit the supplier seeks to make (around 4.8%).
As an example of one of the fee’s we pay; in August, People’s Energy will be due to pay a bill of £155,000 to cover our Renewable Obligation. In terms of operating costs, at People’s Energy we are proactively seeking to keep our costs as low as we possibly can, and we have achieved lower than normal costs due to hard negotiations when making agreements with suppliers, and by keeping Directors’ salaries lower than in other companies (you can find more information on our ‘Full Monty’ page). This has enabled us to keep prices very low for a longer period than most of our competitors when comparing energy prices across the market.
In addition, the forecasted plan for making profits is different to that of the average energy supplier: We are currently not making a profit, still being an energy startup, but we plan to achieve a profit by the end of 2019. Any profit we make is going to help build a buffer that can enable us to weather any unforeseen events, including colder than normal spells, etc. And of course, if we ‘overshoot’ and make more profit than is needed to keep the company sustainable, we will return 75% of that profit to you, the consumer. More on that in a later blog…