Your business electricity bill is made up of all the electricity you consume and nothing else, right? Well, no. It isn’t quite as simple as that.
While your electricity bill incorporates your unit rates per kWh, have you ever wondered how energy suppliers come up with the rates and charges?
There are actually several constituent parts to this. These are the same for all businesses, no matter the tariff you are on. They include:
- The raw energy cost
- The cost of distribution
- Levies and taxes
- Supplier operating costs
All of these must be balanced to leave your supplier a profit.
When you finally get your bill (after your supplier has balanced the books and earned a tidy profit) your electricity bill will be made up of two parts:
- Unit rate (this is the cost of your electricity per kWh)
- Standing charge (this is the cost of having an electricity supply)
These vary among suppliers because different suppliers have different costs.
Surprisingly, smaller suppliers are often cheaper than larger suppliers because they have much lower operating costs. This is why switching to a smaller supplier – or at least one that specialises in business energy – could save you money.
When you look at your electricity bill, you probably won’t think twice about what determines your unit rates and standing charge.
However, it’s good to know how these are determined because it could help you get a better energy deal (you’ll be better informed about how energy is priced, so you’ll be able to seek out suppliers who have a better business model).
How much does each part contribute to my electricity bill?
This is the golden question.
If we use 10p/kWh as a benchmark for a unit of electricity, it’s relatively easy to calculate how much each part contributes to your bill.
As we said, the amount these constituents contribute to your business electricity bill varies between suppliers, and this is also why green energy can sometimes be cheaper than traditional energy – because of lower costs in one area or another.
Here’s a breakdown of the costs in a pie chart:
Now, let’s go ahead and look at the key contributors (wholesale costs, network costs, operating costs, environmental and social obligations, VAT, and climate levies) to see how much each constituent part contributes to your bill:
Wholesale costs contribute 3.51p/kWh so 35% to the overall cost.
Wholesale costs are essentially raw energy purchases. These are made in bulk. The cost of the raw purchase would be 3.4p/kWh.
We also have to factor in energy losses in the network (0.1p/kWh) and imbalance costs (0.01p/kWh) bringing the total to 3.51p/kWh.
Network costs contribute 2.29p/kWh so 23% of the overall cost.
Network costs include distribution, transmission, and balancing. The costs are split across the national distribution and local transmission networks.
The costs are split as follows:
- Distribution – 1.7p/kWh
- Transmission – 0.5p/kWh
- Balancing – 0.09p/kWh
Supplier operating costs
Supplier operating costs contribute 1.24p/kWh so 12.4% to the overall cost.
Supplier operating costs are the costs the supplier faces to deliver your energy to you. They include the cost of metering, customer service, improvement works, legal work and so on. In other words, they cover the cost of ‘doing business’.
Environmental and legal obligations account for 0.94/kWh so 9.4% of the overall cost.
Energy suppliers must pay a variety of levies, taxes, and payments for environmental and social causes. These include:
- The Renewables Obligation (RO)
- Contracts of Difference
- Electricity Energy Companies Obligation (ECO)
- Smart Export Guarantee
VAT and climate levies
VAT and climate levies account for 2.02p/kWh so 20.2% of the overall cost.
This makes up the total 10p/kWh of electricity.
- VAT is charged at 20% (although, an exception applies if you are a micro business consumer – in this case, a 5% VAT charge applies).
- The Climate Change Levy for electricity is 0.00847/kWh (2019/2020).
How much profit does my energy supplier make?
Now that you know what makes up your business electricity bill, you may be wondering how much money your supplier is making from you.
The answer is less than you think!
Most energy suppliers have a margin of 3% to 5% for electricity, but some suppliers can rake in as much as 10% if a business is on an out of contract rate.
Such a small margin (3-5%) would be the death of many small or medium-sized businesses, but energy companies have hundreds of thousands of customers. Some have millions. Profitability in the energy sector is as high as it has ever been. Businesses need energy and suppliers control the market. Supply and demand = high profits.
That doesn’t mean you have to pay over the odds for your energy though – you could save hundreds of pounds a year if you switch with EnergyBillKill.