How do energy prices work?

Posted 29/03/2016 by E.ON

Lots of questions can come up when trying to get to get to grips with how much you’re paying for your gas and electricity – from ‘what does my energy bill mean?’ to ‘why do wholesale energy prices fluctuate?’. In this post, we want to get to the bottom of exactly what makes up the price of your bill, so that you understand what you’re paying for and why you’re paying for it.

What makes up a bill?

First things first, what exactly contributes to the number at the bottom of your bill?

    The actual cost of energy the biggest chunk of your bill (about 46%) goes directly to pay for the energy you use. This is the wholesale price that we pay to buy gas and electricity from the energy market.

    Transporting energy – we use pipes and cables to get energy into your home. These are owned by other companies and we pay a fee to transport our gas and electricity across the country.

    Customer care – customer care is an important part of our business and we spend around 15% of the total cost of your energy bill on call centres, meter readers and mechanics.

    Helping vulnerable people – the latest figures from the 2015 Fuel Poverty Report estimated that approximately 10% of all UK households live in fuel poverty. A portion of energy costs goes towards helping our most vulnerable customers through the Warm Home Discount and energy saving home improvements

    Investing in the future – at E.ON, we’re committed to renewable energy. So we use 5% of the total cost of your bill to run renewable energy projects, like wind farms.

    Our earnings – is the amount left over after paying the cost of energy, getting it to our customers' homes and our operational costs. Our profits are roughly £4.70 out of every £100 our residential customers spend.

    UK windfarm - E.ON

    So why do energy prices go up and down?

    There are lots of reasons that energy prices can fluctuate. Power is bought on the open market, so it is subject to lots of external factors, like:

    World events – if there’s a war or political change in a country that produces natural gas, prices can fluctuate. This is because extraction and accessibility can become more difficult, so prices will increase.

    The weather – yes, the weather can have an adverse effect on energy prices too! Not only can hurricanes and natural disasters disrupt the energy infrastructure, but winter and cold weather increase the demand for energy, meaning that prices will rise.

    Regulations and market reforms – tax changes, new regulations and ambitious carbon targets all have an effect on the price companies pay for energy.

 What does E.ON do to manage these changes?

We call it ‘hedging’ and it’s the strategy we use to buy our energy. We make sure that most of the energy we buy from the energy market is purchased a long way in advance, so that we can ‘smooth out’ any variations in prices over a long period of time. Of course, we might need to ‘top up’ and buy extra energy if it’s a particularly cold winter, but we try to manage changes in the market by keeping one step ahead.

Is there anything else I can do to make sure my energy bill is as low as possible?

We’ve got lots of other initiatives in place to help you save money on your energy bill.

You can set up a fixed monthly direct debit - If you pay your bills by a fixed direct debit, you could save up to £70 a year by switching to direct debit.

    Apply for our Dual Fuel Discount - We give our customers a £20 discount if they have both their gas and electricity with us.

    Take advantage of our rewards scheme - E.ON Rewards are our way of saying thanks to our customers. Throughout the year you can earn up to £60 in Tesco Clubcard points to spend on what you like.

    Go paperless and save money - We’re doing our bit for the environment, so if you opt in to an online account and paperless billing, you can save £10 a year.

 It’s really important to us that our customers get good value for money. Whether it’s a question about your bill or you’re worried about your bill, there’s help available if you need it. If you’d rather talk to one of our advisors, you can always call us on 0345 302 4251.

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