The average UK small business spends approximately £5,000 a year on electricity (that’s around 16% of operating costs). Around 40% of SMEs also spend an average £4,000 annually on mains gas – or approximately 13% of their running costs, according to a study by Ofgem and BMG. It's clear to see that making savings on the cost of your gas and electricity could make a significant difference to your business.

There are plenty of factors that contribute towards gas and electricity costs. Government policies, the weather and global events all play their part in shaping how your energy provider decides what to charge. Ultimately, when it comes to your energy bill, having an understanding of how prices are calculated could help you to find a better deal.

What are wholesale energy costs?

45% of the costs on an average bill are wholesale costs.  These include the cost of the commodity (gas or electricity), the cost of trading on the market, and internal balancing costs. Market prices go up and down in line with a number of different factors. These include the ever-changing cost of production, as well as supply changes and spikes in demand. Political events, natural disasters, and the unpredictable weather can all wreak havoc on the amount of energy available as supply, which can push up wholesale market prices.

To try to keep prices steady, energy companies buy wholesale energy up to years in advance, as well as on the day of use to keep pace with demand. Known as ‘hedging’, buying ahead like this helps to even out prices over time, weathering the storm of any market fluctuations, as well as securing enough energy to reliably keep lights on and kettles boiling across the nation.

What are network and distribution costs?

You’ll notice network costs on your bill as the ‘Transmission Use of System Charges’ (TNUoS) and ‘Distribution Use of System’ (DUoS). These cover the cost of getting gas and electricity to customers, including paying for upgrades to the national grid and gas pipelines. They make up around 24% of an average bill, in combination with other operating costs, and they’re set by the network operators and industry bodies – not the energy suppliers.

What environmental and social obligations do energy suppliers have?

Around 26% of your bill will go towards government charges – like the Climate Change Levy (CCL) that supports investment in the production of renewable energy. It’s a payment designed to make customers pay more attention to how their energy use affects the environment. Suppliers also contribute to social causes, including fuel schemes for vulnerable customers.

What are the supplier’s operating costs?

The costs associated with registering and administering customer accounts make up the remainder of an average energy bill, alongside metering and a small profit margin.

How can I reduce my bill?

Suppliers are free to choose how and when to make changes to their pricing, but under Ofgem rules they must give customers at least 30 days’ notice. That means it’s down to you to decide whether to accept a price increase or switch to another supplier.

The Competition and Markets Authority found that around 40% of businesses have been with the same energy supplier for over five years, meaning they could be languishing on higher cost variable tariffs or deemed rates. The good news is that most customers on deemed rates only need to give 28 days’ notice to switch providers. Small businesses, where making savings can often make the biggest difference, could be missing a trick.

Next Steps

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Although summer isn’t normally associated with high energy use, bills can still creep up, especially when we turn to air conditioning and desk fans to cool us down during hot days in the office. The Carbon Trust says that ‘simple low or no cost changes could slash your energy costs by at least 10%.’

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Hudson Energy

Hudson Energy UK is working with Informi to enable businesses to receive outstanding service and support with their energy needs and to help them to reduce costs.

Founded in 2002, Hudson Energy is a leading supplier of electricity and gas, dedicated to bringing better gr...

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