Most of you reading this will have seen the price you pay for gas and electricity rise this year, perhaps more than once. Wholesale costs are on the up, while temperatures across the UK have plummeted into November.
Turning up your heating, needing lights on for longer, and swapping summery salads for comforting winter stews all add to your energy bills. But it’s the company you buy your energy from and the type of tariff you’re on that are likely to have the biggest impact on your pocket over the colder, darker months.
If you think the upcoming price cap will protect you from hefty bills, do think twice: recent research by Which? found that many tariffs will be untouched by the price cap. So how can you try and limit your energy costs during the times when your usage will inevitably increase?
Read on to find out the different costs which make up your energy bill and how much control energy firms really have. Or compare gas and electricity prices to make sure you’re not overpaying for energy this winter.
Your energy bill
Energy companies frequently blamed their price increases on rising wholesale prices. These are indeed increasing (see ‘wholesale energy price rises’, below) but make up less than two fifths (38%) of your annual bill.
The rest is made up of:
- Network costs (maintaining the pipes and wires that carry gas and electricity to your home)
- Costs of meeting environmental and social obligations (government schemes to save energy, cut emissions and help the fuel poor)
- Other direct costs (such as broker’s costs, commission for comparison website sales, smart meters)
- Operating costs (the costs of running a business, including customer service, IT, building costs)
Most of these are fixed costs which most companies can’t cut. But they can control their operating costs and profit margin – and use these to offer cheaper deals.
Wholesale energy price rises
Wholesale gas and electricity prices are volatile; they change frequently based on fuel costs (such as coal, gas, nuclear) and global supply and demand. For example, high demand during the cold spell across Europe earlier this year pushed up gas prices. The UK also relies on gas imports from pipelines or liquid natural gas, so prices must be high enough to attract sellers to the UK.
A third of our electricity is generated from gas so if it’s pricey or scarce electricity costs rise too.
Buying gas and electricity: big energy firms
Companies can determine the prices they pay for gas and electricity to an extent. The source of the energy (whether the company generates it, has a contract with a producer, or buys it entirely from the wholesale market) and how it’s bought both have an impact on costs.
Since wholesale prices vary, your energy company is likely to buy gas and electricity in advance for stability. Energy firms’ hedging strategies are highly confidential; even energy regulator Ofgem doesn’t check them.
Eon explained: ‘Wholesale energy costs change every day, sometimes dramatically… so we use… hedging to manage this uncertainty. By securing the energy our customers need a day, month or even a few years in advance, we can smooth out these daily variations to give security of costs.’
EDF Energy said: ‘When we offer a tariff with prices that are fixed for a length of time (eg one or two years), we may decide to buy the full year’s energy costs at once… to give us more certainty.’ So hedging allows your energy company to offer you consistent prices long term.
But Greg Jackson, Octopus Energy CEO, explained that ‘hedging is a cost – it’s like an insurance policy’, perhaps explaining the higher price of three-year deals.
Buying years ahead also comes with risks. Audrey Gallagher, Energy UK policy director, told us: ‘Companies that have bought in advance are locked into that price, so if these prices come down they cannot take advantage.’
Buying gas and electricity: smaller energy firms
Smaller energy companies might not be able to buy as much gas and electricity, or as far in advance as bigger companies.
These companies may not have the credit history or assets to use against their exposure to the wholesale market, Dr Craig Lowrey Cornwall Insight senior consultant explained.
Some suppliers will take your direct debit up front when you sign up, so they have the funds in advance of buying energy. For example customers of Bulb Energy, Economy Energy and So Energy pay in advance.
Wholesale prices have dropped: why haven’t my bills?
It’s a common complaint that when wholesale prices go down, customers’ bills don’t seem to follow as quickly. Occasionally energy companies do reduce their bills – for example Bulb cut customers’ bills twice, in April and June 2017, saving them £45 on average, in response to gas prices being lower – but often energy companies’ prices remain steady.
If you have a fixed deal, you’re committed to paying a set price for every unit of energy you use for the duration of the deal. So companies have a good idea of how much energy they’ll need to supply and tend to buy it near the time the fixed tariff goes on sale.
Ed Kamm, First Utility‘s chief commercial officer, said First Utility buys in advance: ‘we sign a customer up to a term contract and try to buy how much we think they will need for a year’.
So the price of fixed deals may more closely reflect the price of energy at the time they’re launched.
In contrast, SVTs often seem slow to catch up.
Steve Harris, Ovo Energy’s energy director, told us that its SVT ‘need[s] to move with the market, but our trading approach smooths out any peaks and troughs in prices’. To do this, Ovo buys energy over an extended period, for example, buying 1/12th of the energy it forecasts it will need every month in the year, so final costs are ‘a rolling average across the last 12 months’.
This helps explain why it can take time for changes in wholesale prices to reach your bills. In contrast, Bulb hedges its SVT for four months. Co-founder Amit Gudka said this means ‘when wholesale prices fall, we can pass those savings on a lot quicker’.
Top tips to cut your energy bills
Wholesale costs and how companies set their gas and electricity prices are beyond your control. But there are things you can do to cut the cost of your bills:
- Check if you’re overpaying for gas and electricity. See our top five cheapest deals for November 2018 and run your own comparison of gas and electricity prices on Which? Switch.
- See if you can get a discount on your energy bill by paying by direct debit or opting for online billing.
- Send your supplier regular meter readings to help keep your bills accurate. Know how to read your gas meter and how to read your electricity meter.
- Replace traditional light bulbs with LEDs; over their lifetime you could save £180 on electricity.
- Don’t leave your gadgets on standby. This could add around £30 to your annual energy bill.
Tried these and still worried about your energy bills? Find out if you’re eligible for government grants and energy schemes.