How do you read your gas or electricity bill? And what contributes to the price you pay? Here’s everything you need to know about your energy bill.
Energy bills are a big concern for most of us. The amount we have to pay each month has rocketed over the last couple of years, putting household finances under extraordinary pressure.
On 1 January the Ofgem energy price cap increased by 5% to £1,928 a year based on the regulator’s typical use figures. That’s almost double what most paid before the energy crisis hit, and with doing an energy comparison to find cheap fixed deals not offering the savings it once did, many are feeling the pinch.
We look into the future of energy bills in our Will energy prices fall in 2024? article, but if we’re to keep our own energy bills as low as possible, it’s important to understand exactly how they’re calculated.
How do you read an energy bill? And what contributes to an energy bill? Here we explain your energy bill in depth.
If you’re struggling, see how to get help with gas and electricity bills. .
How to read your energy bill
Checking your energy bill carefully helps with the following:
- Keeping tabs on how much energy you’re using and whether you need to take action to use less.
- Making sure that the readings are correct rather than being estimates, and that you’re not paying too much or too little.
- Seeing if the provider has moved you from a fixed tariff onto their standard variable tariff.
Reading your bill: Meter readings
The meter reading is the all-important measure of just how much gas and electricity you’ve actually used. There might be a letter next to the confusing looking row of numbers, and it’s important to know what that letter means.
- A: A meter reading taken by the supplier at the time the bill was put together
- C: A meter reading you provided yourself
- E: An estimate, which means the energy provider has taken a guess as to how much energy you used since the last bill
If they’ve estimated too much then you’ll be charged for power you haven’t used. If the estimate is too low then you’ll be asked to pay less than you should be doing.
Don’t be tempted to keep quiet about an underestimate. While it can seem like a good idea while juggling other bills, your energy provider is going to get an accurate reading eventually. When they do, you’ll find yourself owing a debt which could, over time, build into something substantial. If the estimate is out in either direction, contact your provider and give them an accurate reading.
Find out more about what happens if you overpay or underpay in our guide to direct debits.
Reading your bill: Your tariff
The name of the tariff will come in extremely handy if you start looking for a cheaper tariff. Also, if you see you’re on a provider’s standard variable tariff then there’s every chance you’re paying the maximum they charge for energy.
Reading your bill: The TCR
This is the ‘tariff comparison rate’, which details how much you pay per unit of energy when everything such as standing charges or special offers have been taken into account. The TCR is a quick and dirty way of comparing different tariffs, as it captures how much per unit the average customer would be paying on a particular tariff.
Reading your bill: Payments
If you pay by direct debit then the payment details will show how much the direct debit will be and when it’ll come out of your bank account. If you pay when billed, then the amount will be the full amount of the bill, and the date will be when it has to be paid.
Reading your bill: Energy use
This is where the bill details how many kWh (kilowatt hours) you’ve used over the billing period. This may not mean much on its own, but many bills now let you compare your usage with the same time last year. If it’s gone up significantly, you can start trying to find out why. If it’s gone down, you’re going in the right direction in cutting your energy use.
Reading your bill: MPAN and MPRN numbers
Locating your MPAN or MRPN numbers on a bill is very useful. These are unique numbers: the Meter Point Administration Number (MPAN) for electricity and Meter Point Reference Number (MPRN) for gas. They’re linked to your meter and property, not your supplier. Knowing them makes things simpler when you decide to switch suppliers.
Some bills show them clearly, others hide them away, but you can look out for the following:
- MPAN: starts with an ‘S’ and has 21 digits in total
- MPRN: has just 10 digits
Note: neither of these numbers is your customer reference number, which will be clearly labelled on every bill.
By the time you finish reading (and understanding) your bill, you should have an idea of how much energy you’ve used, whether this is a normal amount for you, and how much it’s cost you.
But what exactly are you paying for? Next we’ll look at what makes up your overall energy cost.
What contributes to our energy bill?
Energy bills explained: Wholesale costs
Wholesale costs are what energy suppliers pay for the energy supplied to your home.
Energy suppliers buy gas and electricity from energy producers on the wholesale market. The cost of doing so can rise or fall depending on a host of different factors.
For example, wholesale energy costs were driven up sharply by the invasion of Ukraine, due to the reduction in supply. And following the relaxing of COVID restrictions, the growth in demand for energy also pushed up wholesale prices.
As obtaining that energy becomes more expensive, suppliers will tend to ratchet up what they charge their customers – meaning higher bills.
Generally energy suppliers try to purchase their energy in advance, sometimes by two to three years. This then gives them a little more certainty over the pricing of their tariffs.
It also helps to explain why, even though wholesale energy costs have been falling for some time, it took a little while for that to truly feed into the levels of the energy price cap, and before that the Energy Price Guarantee. We explain further in our guide to whether energy prices will go down in 2024.
Wholesale costs account for around half of our bills.
Energy bills explained: Network costs
Network costs cover the gas pipes and electricity cables that bring the energy into your home.
Our energy suppliers don’t actually own these pieces of infrastructure; instead they belong to energy networks.
These networks charge the supplier for using them to supply our homes, and those costs are passed on to us, the customer.
The money we pay goes towards maintaining those networks, as well as upgrading them where necessary. The costs can vary over time; for example, if the network wants to carry out specific upgrades.
Ofgem, the energy regulator, oversees these fees to make sure that we aren’t getting ripped off.
The regulator also points out that these network costs include balancing charges. The idea is that the energy networks need to make sure that the right amount of energy is available on the grid to meet demand at any point. Supply and demand is balanced second-by-second for electricity, and over a daily basis for gas, with the costs of overseeing that balancing act added to our bills.
Given the way that supply and demand for energy can change over time, so too will the size of the balancing charges incorporated into our bills.
Around a fifth of our energy bill comes from network costs.
Energy bills explained: Operating costs
Operating costs cover the money energy suppliers need in order to carry out their duties, and make up around a tenth of our energy bills.
For example, energy suppliers need to have a customer service team in place – whether over the phone or on live chat – ready to answer our questions or help when things go wrong.
There are also administration costs involved with running an energy supplier, like sending out bills or monitoring our meter readings. Part of our bill each month goes towards the costs of effectively running an energy supplier.
Energy bills explained: Unexpected costs
Energy suppliers are also able to add a little extra to our bills to cover unexpected costs.
A recent example are the costs incurred by suppliers going bust back in the winter of 2021/22.
This ‘adjustment allowance’ accounts for around £19 of the current £1,834 typical households pay through the energy price cap.
Energy bills explained: Social and environmental costs
Energy suppliers are required to contribute to a range of social and environmental schemes, and part of our energy bills helps fund those contributions.
There are a host of such schemes in place. For example there’s the Warm Home Discount, a scheme set up to provide those on certain benefits with a £150 payment over the winter to help cover energy costs.
There is also the feed-in tariff. Though it is closed to new applicants, people who signed up were able to get payments for powering their home through renewable energy. They are still entitled to those payments too.
Under the current price cap, these costs account for around 8% of our bills.
Energy bills explained: VAT
Taxes, and specifically VAT, make up a portion of our energy bills.
VAT on energy bills is levied at 5%. That’s substantially lower than the 20% we pay on other spending that incurs VAT, but nonetheless it does mean an increase to the size of our bill.
Energy bills explained: profit margin
Energy suppliers are businesses and so expect to make a profit from their work.
Suppliers don’t particularly like to talk about this, instead emphasising how important it is for them to give customers a fair deal and support them, particularly when times are tough.
However, the reality is that energy suppliers also want to make some sort of profit. As a result, when they work out our energy bill, there’ll also be a portion set aside for their profit margin. This typically makes up around 5% of the bill. Those profits could then be reinvested into the business, or shared with investors.
Keeping your energy bill as low as possible
If you want to keep your energy bill low then you need to find ways to reduce how much you use. With VAT for example, the amount of tax you pay will go down if you use less energy. Similarly, the more energy you use, the bigger the impact will be if wholesale costs increase.
We have put together a comprehensive round up of the best ways to use less gas and electricity, including switching to energy efficient appliances, dropping your thermostat by a degree and changing the temperature you wash your clothes.