Pricing energy is a complicated business, we have a simple pie chart to show our breakdown so that you can see at a glance what you are paying for, but if you would like to know more we have explained it in more detail below.
Have you ever wondered how your Energy supplier decides what to charge you for your gas and electricity? Well, we can’t comment on how our competitors calculate their charges but here at Go Effortless Energy we try and keep it simple!
We work out all of the costs associated with supplying energy to our customers (direct charges which we have no control over) and also how much it costs to run our business (overheads which we can control).
We then break these costs down to how much each customer costs us to service and then we calculate a pence per kilowatt hour price and a daily standing charge price. We will go into why there are pence per kilowatt hour charges and daily standing charges a little bit later but first we thought you might be interested in knowing what our direct charges and what our overheads consist of so we have listed them here:
The image shown is ofgems typical energy customer.
- Naturally, electricity and gas are the biggest individual cost. This cost varies depending on availability of gas and electricity (supply) and how much is being used by homes and businesses (demand). This variability is happening constantly throughout the day (for example we use more electricity and gas when we are cooking, using the washing machine and heating our homes than when we are sleeping). The variability is also happening throughout the year (for example we use more energy during the winter months when it is colder and darker than we do during the summer months). There are ways to reduce our companies exposure to these variabilities such as buying energy in advance at a set price which means if the price goes up or down we still pay the contracted price.
- Transportation of the electricity and gas is the next biggest cost. In the same way that products that you buy in a supermarket need to be transported from the factory that takes them to the supermarket shelves, we have to pay someone to transport the electricity and gas from the power stations and gas terminals to our customers homes and businesses around the country. The cost of this varies slightly depending on where you live in the country as each of the Local Distribution Network Operators have slightly different charges and this is why the pence per kilowatt hour price is different depending on where you live.
- Meter reading charges. As you would expect we need to send someone to read your gas and electricity meters at least once per year. This is to ensure we have the correct information about how much energy you have used which ensures that you are paying the correct amount. Therefore, there is a cost associated with paying the meter reading company to send someone to physically read your meters.
- Meter asset charges. This is not something that most people would think about but your gas and electricity meters are owned by another company and they rent this asset back to your energy supplier who then passes this cost on to you.
- Environmental levies. These are charges that the government add to your electricity and gas bill in order to pay for their environmental policies – these include:
- Energy Company Obligations (ECO) – this scheme obliges energy supplier companies (who have more than 250,000 customers) to carry out energy efficiency improvements to the homes of their low income customers. The idea is to reduce the energy bills for the poorest members of society. The energy companies are obliged to pay for these home improvements and are then allowed to add these costs to all of their customers energy bills. Therefore, if your energy supplier is obliged to be part of this scheme and you do not qualify for the home improvement work to be carried out on your property you are still paying a proportion of the costs involved with improving someone else’s property but receiving non of the benefits.
- Renewables Obligation (RO) – this scheme is designed to provide subsidies to the companies who generate electricity from renewable sources such as wind farms, wave power and solar energy. The subsidies given to these companies is to incentivise them to invest in greener forms of producing energy.
- Charges to participate in the energy markets. These include fees charged by wholesale gas and electricity suppliers and also the industry bodies that oversee the energy markets and ensure that the whole system works the way it should.
- VAT is charged at 5% and is paid directly to the government.
- Staff salaries.
- Offices and office equipment.
- IT resources – computers, internet connection, website development & support.
- Marketing materials and activities.
- Financial charges associated with operating a business bank account and setting up and collecting customer direct debits.
PPkWh V DAILY STANDING CHARGE
We mentioned before that we calculate a daily standing charge and a pence per kilowatt hour charge for each customer. The reason for the two different charges is that some of our costs are fixed and some of them are charged on a per kilowatt hour basis.
Therefore, we work out all of our annual fixed costs (such as meter reading, meter asset charge, some transportation costs and some of the fees associated with participating in the energy market) for each customer and then divide this by 365 (number of days in the year) and this is the price you pay for the daily standing charge. We then calculate all of the per kilowatt hour charges (such as the cost of the electricity and gas (including dealing fees), transportation costs, environmental charges and fees to participate in the energy market) and we add a small charge to cover our overheads and this is the pence per kilowatt hour price that you pay.
You may ask yourself, why can’t you just charge me a pence per kilowatt hour charge? The answer is that we want to make our pricing policy as fair as possible for us and our customers. If we were to charge just a pence per kilowatt hour price then we would have to work in our fixed costs with our variable costs. This would mean that we would effectively have to guess the amount of energy you would use over the year and then use this figure to calculate your pence per kilowatt hour price.
There are three reasons why this is not fair or practical:
- You could use more energy over the year and so you would end up paying more than you need to – you lose.
- You could use less energy over the year in which case you would pay less than we need to cover the costs of servicing you as a customer – we lose.
- We would have to work out everyone’s energy prices on a case by case basis as everyone uses different amounts of energy. This would be time consuming and would just add to our overhead costs of providing you with our service which would mean we would have to charge you even more.
It is for these reasons that we think the simplest and fairest pricing model is a mixture of daily standing charges and pence per kilowatt hour charges.