Factors that affect energy prices

What factors affect energy prices?

Your energy bill can be broken down into 6 elements: Wholesale costs, Network costs, Environmental and social obligation costs, Supplier operating costs, VAT and Pre-tax margin. We see what factors affect energy prices.

Wholesale costs of energy

The largest of these elements are Wholesale costs, which can make up 40-50% of energy prices. Wholesale costs are set by the market, and change most days with supply and demand. It is the price energy suppliers pay to buy the gas and electricity that they sell to you. Often bought far in advance, suppliers have to estimate how much they will need to cope with demand. This is why longer spells than usual of cold weather can push up the price of gas, as suppliers have to buy more at short notice (and therefore usually at a higher price) than they had anticipated.

Network costs

These contribute to around 20-25% of the cost of energy prices. Network costs are charged to energy suppliers by the network companies for using their distribution networks to transport gas and electricity around the country. They vary by region.

Environmental and social obligation costs

Part of the price of energy (7-8%) consists of various government charges, the main charges being:

The Energy Company Obligation – an energy efficiency programme which places legal obligations on suppliers to deliver energy efficiency measures.

Renewables Obligation – provides financial support for renewable electricity generation. The government has a target to produce 15% of its energy from renewable sources by 2020.

Feed in Tariff – contributes to the tariff paid to homeowners and commercial installations that generate electricity via renewables.

Smart meters – contributes to the government-led initiative to have smart meters in every household and premises by 2020.

Supplier operating costs

Making up around 14-15% of your energy bill, Supplier operating costs are those incurred by suppliers for running their own business. So this will include the cost of sales, advertising, salaries, billing, and metering.

VAT costs

Businesses pay VAT at 20%, while homeowners, tenants and charities pay VAT at 5%.

Pre-tax margin

Lastly, the profit energy companies make on selling gas and electricity to homeowners and businesses (8-10%).


Perfect Clarity can help businesses save money on their energy and water contracts. Call 020 3372 6517 for more information.