Energy is necessary for running our businesses and homes, but it can be costly. Consumers and suppliers alike have borne the brunt of the UK’s energy crisis, which has since seen the price of energy skyrocketing thanks to high energy tariffs.
Reading your energy bill, however, can help you find ways to reduce your usage and save money. While it can be confusing to understand the differences between energy tariffs, it is crucial that you do.
Besides the gas or electricity you consume daily, various costs make up your energy bill. Understanding your energy bill can be challenging, but avoiding wasteful spending depends on it. The following guide will help you better understand your energy bills.
How Are Energy Bills Calculated?
If you don’t have a smart meter or pre-pay for energy, your monthly energy bills are calculated based on how much energy your business or household consumes. Your bill will also reflect a breakdown of various charges, including a daily standing charge you must pay. The costs of keeping your home or business connected to the grid are covered by the standing charge that is included in all energy plans.
Reading Your Energy Bills
Working from home consumes more than 50% of your household’s energy consumption, so consider switching to a business energy provider. It can help you reduce your consumption and save money since there is a cap on energy rates for non-domestic energy consumers under the UK’s Energy Bill Relief Scheme.
In addition to the standing charge, both commercial and residential energy bills in the UK will feature the following costs:
- Wholesale costs: This is the amount charged by power stations to produce electricity.
- Value added tax (VAT): In the UK, domestic users pay 5% of their energy bills, while businesses pay 20%. Small businesses that limit their energy use can reduce the 20% VAT rate to 5%.
- Climate change levy: Non-renewable energy units are subject to a climate change levy.
- Social and environmental obligation costs: Costs incurred by the efficient operation of energy grids and distribution channels
What Are the Energy Tariff Types?
Two primary types of energy tariffs are fixed rate and variable rate tariffs. However, dual fuel and prepayment tariffs are also available from suppliers.
Fixed Rate Tariffs
Fixed-rate tariffs help you stay in control of your budget for a set period, and you’ll likely pay lower rates than you would under a standard default variable tariff. Fixed rates apply only to unit costs, and your charges will be based on the number of units you use. The more energy you consume, the higher your bills will be.
Variable Rate Tariffs
Variable tariff prices are subject to market fluctuations. In other words, if prices fall, you might save money on your energy bill; however, if they rise, you might pay more. Under Ofgem’s price cap program, suppliers have a limit for how much they can charge for each unit of energy for default and variable tariff customers. Standard variable tariffs will also be the default pricing plan for suppliers. Your supplier has likely rolled you onto this tariff if you had a fixed-rate contract with them ended.
Dual fuel Tariffs
Dual fuel tariffs allow you to get your gas and electricity from the same provider, which simplifies your life. These tariffs often come with a discount from suppliers.
In terms of energy, this is the equivalent of a prepaid phone, and you will need a prepayment metre to use it. With this system, you top up the metre online via a key, a credit card, or a token before you can use the energy.
What Impacts Your Energy Bill?
Your energy bill will increase as you use more energy. Energy usage is directly proportional to your bill; the less energy you use, the lower your bill and vice versa. In addition to supply and demand, other factors also affect energy pricing.
The high cost of electricity today is due to the following factors:
- Availability of energy generation: It may be necessary to build more generation plants to support consumption if demand exceeds supply.
- The weather: Extreme weather conditions can lead to power outages and increasing energy demand.
- Supply chain issues: Manufacturers and power plants can have problems getting replacement parts for turbines and other equipment.
Checking your energy bills regularly is more important than ever. Doing so will ensure you avoid overspending. It also allows you to avoid any overcharges. Additionally, it will allow you to determine ways to reduce the energy you use.
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