Energy bills: what are we actually paying for?

Although new Prime Minister Liz Truss has announced a two-year price guarantee for customers from October, household energy bills remain at a record-high. Find out what you're actually paying for below.

It's a confusing time for energy customers. Ofgem, the energy regulator, announced in August that the price cap would see annual energy bills for a typical household reach £3,549 from October. 

The Prime Minister revealed plans two weeks later to freeze unit rates for two years from October instead, called the Energy Price Guarantee (EPG), making typical bills £2,500 per year.

What you'll actually pay for your own household is your daily standing charge for each fuel, plus a new unit rate for each unit of energy used. You can calculate this by multiplying your new unit rate by the number of units of energy you use in the year. 

The government freeze will put unit rates for most people in Great Britain around 34p per kWh for electricity and 10.3p per kWh for gas, but check yours in your account with your energy provider.

Your bills don't just pay for the cost of the energy itself, though. To help you get your head around what you're paying for through your energy bills, we've used Ofgem's most recent breakdown of what makes up household energy payments (published in August 2022 for the October price cap) to see how much each element will account for when the new prices come into effect on 1 October.

Get help with your household bills with our latest cost of living advice and tips

What makes up your energy payments?

Ofgem releases figures for the percentage of your bill that is paid towards particular things. Figures above 5% have been rounded to the nearest percentage.

In brackets is how much you'd be spending on each of these elements if you were a typical household with an annual bill of £2,500. That's assuming a 'medium' amount of energy use – set as 2,900kWh of electricity and 12,000kWh of gas per year. 

Get the usage figures for high, medium and low-use households, and how much they would pay in our guide to how to estimate your own energy use.

Energy bill breakdown from October 2022

• Wholesale energy prices  75% (£1,884.75)
• Network costs 8% (£204.25)
• VAT 5% (£113.50)
• Operating costs 6% (£159.00)
• Supplier of Last Resort 1.8% (£45.50)
• Adjustment 0.9% (£22.75)
• Headroom  0.9% (£22.75)
• Policy 0.9% (£22.75)
• Direct debit uplift 0.5% (£13.50)
• Smart meter roll-out 0.4%  (£11.25)

Wholesale prices of gas and electricity, which have risen sharply since autumn 2021, will make up three quarters of your energy bills from October 2022. This is the cost of buying energy from wholesalers and has the biggest influence on how much you pay. 

Network costs cover the costs of the pipes and cables that carry energy into homes, as well as running, maintaining and and upgrading the UK’s energy infrastructure. This makes up 8% of your energy payments.

Operating costs cover business expenses such as customer service and billing, and will make up 6% of your bills.

Other notable elements include the costs of the Supplier of Last Resort (SoLR) scheme. This process ensures that customers whose energy provider has failed are guaranteed continuity of supply by being moved to another energy company. Because so many small energy suppliers went bust in 2021, SoLR costs have significantly increased in the past 12 months. They will make up 1.8% of your household energy payments come October.

The roll-out of smart meters, meanwhile, will make up about 0.4% of your bills. Energy suppliers have a deadline of the end of 2025 to install smart meters in the homes and businesses that don't yet have them fitted.

Social and Environmental Obligations – a payment that goes towards policy schemes such as supporting energy efficiency improvements, helping vulnerable households and encouraging uptake of renewable technology – will no longer be included in our energy bills from October. As part of the government's energy support, the Chancellor will be paying for these schemes via taxation instead of charging them to energy billpayers.

Our energy bill calculator: Find out how much your bills might be from October 2022

If you're currently on a variable tariff and pay by direct debit, our calculator will show how much your bills could be over the next two years, including the £400 discount applied from October 2022 to March 2023.

Energy Cost Calculator

Use our simple tool to predict your energy payments for the next 12 months if you stay on a variable tariff and pay by monthly direct debit.

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What are your current monthly direct debit payments?

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Please note that this is an estimate based on the percentage change from the price cap for April 2022 to the new annual bill estimate for a typical household once the government's price freeze is applied, including the £400 discount for the first six months. Your own payments will vary based on how much of each type of fuel you use.

Not sure what discounts to expect this winter? Here’s what you need to know about the government’s energy support package

What is the Energy Price Guarantee?

The Energy Price Guarantee (EPG) will fix unit rates for households for two years from October 2022.

It will apply to all households and your energy supplier will let you know exactly how the EPG will affect your specific prices. You don't need to do anything to apply for the EPG, as it will be given to you automatically. 

While energy prices for suppliers will still continue to change, the government will be paying the excess instead of customers.

The reductions will come on unit rates rather than standing charges, which will stay as they were set by Ofgem for October 2022. 

For people on variable tariffs paying by direct debit in England, Scotland and Wales, unit rates will work out at around 34p per kWh for electricity and 10.3p per kWh for gas. Those in Northern Ireland will have their unit rates reduced by up to 17p per kWh for electricity and 4.2p per kWh for gas. If you pay by prepayment, your unit rates will also be reduced by 17p per kWh for electricity and 4.2p per kWh for gas.

Those who are still on historic fixed tariffs agreed before the price hikes will still be paying their lower unit rates until the end of their contracts. Those who have fixed tariffs higher than the guaranteed figures will see their costs adjusted down to the guaranteed rates, by a maximum of 17p for units of electricity and 4.2p for gas. 

A small minority who recently fixed deals with very high rates in anticipation of soaring costs might find that even with the government's reductions they're still left paying slightly more.

While the EPG means bills will be lower than previously expected for October, they will still be higher than bills are right now. 

All households on the electricity grid will still receive a £67 discount on their October bill – the first instalment of a total £400 payment over the next six months. Most people will see this automatically credited to their energy account. But if you pay by traditional prepayment, you'll be sent vouchers to redeem wherever you top up. 

Find out more about how the Energy Price Guarantee works and what support has been announced for energy customers in Northern Ireland and off-grid homes.