A cursory glance at recent energy news will show a wealth of stories around the increase in gas prices for the UK, and on the other side of the coin, the continued growth and reductions in cost for renewable energy generation. Many consumers and businesses alike could be forgiven for assuming that the significant growth in our energy bills is due entirely to the changes in wholesale energy prices, particularly as the UK slides further into a gas crisis as we juggle increased demand for baseload power with dwindling domestic production and a growing reliance on imports from Continental Europe. In truth, while changes in wholesale commodity prices do impact on your energy bill, their impact is significantly less than many people think.
Currently, wholesale energy costs make up around 47% of the average gas bill, and only around 38% for electricity. The rest of the bill is made up of a variety of additional costs, and it is the growth in these that is putting pressure on energy bills, rather than changes in the wholesale market.
Once the energy has been purchased, energy companies are faced with the complicated task of distributing it to the businesses and consumers that are buying it. As a result, for every unit of energy used, fees must be paid to keep the distribution network in good working order. These fees make up around 26% of gas bills, and 28% of electricity bills.
For electricity in particular, a major pressure on bills is the range of environmental and social obligations that are incorporated into end user bills. For gas this makes up as little as 1% of total costs, but for electricity can be as much as 14% of the total bill. Initially, these were primarily made up of the costs associated with the Feed-In Tariff, for small-scale renewable energy producers, and Renewable Obligation for larger ones, aimed at encouraging renewable energy generation by offering higher guaranteed prices for wholesale energy or payments for businesses or landowners that produced renewable energy.
Since 2015, the UK have been in the process of replacing these two schemes with a single substitute, the Contracts for Difference. While well intentioned, the earlier schemes rapidly grew to a point where they were no longer viable, offering what in hindsight were overly generous terms for renewable energy generators. While it was unavoidable that major changes were required, it leaves the UK in a difficult position as many FiT or RO eligible producers are guaranteed their agreed rate of return for a 20-year period. As a result, bill payers are saddled with paying not only the new Contracts for Difference scheme, but at the same time are required to continue to pay for an outdated system for renewable energy that has been shown to be ineffective and overly expensive. As a result, environmental levies will continue to make up a significant, and growing, portion of total energy bills for a significant time to come, with many RO and FiT-eligible schemes set to receive payments until at least 2030.