John Burn-Murdoch Breaking down the pressures on energy bills

Scottish and Southern Energy (SSE) today announced that its typical dual fuel energy bill will rise in price by 8.2 per cent in November.

SSE is blaming the price hike on increases in wholesale energy costs, network distribution charges and changes to the government schemes energy companies pay into. SSE’s own figures, however, show the biggest increase in any component of the bill comes under other costs at its end including profit margins.

SSE says 90 per cent of a typical customer’s bill is made up of four components: the wholesale cost of their energy use accounts for 50 per cent, charges for delivering energy to their home and maintaining the metering system account for 25 per cent, paying into government energy schemes comes in at 10 per cent and VAT adds 5 per cent.

This is similar to the typical scenario set out by the Department for Energy and Climate Change (DECC) earlier in 2013. DECC estimated that 81 per cent of user costs are accounted for by these inputs. The bulk of the 9 per cent discrepancy concerns network charges, where DECC’s figure of 20 per cent is five percentage points below that of SSE.

As a result SSE estimates that just one tenth of a typical bill is spread across other costs at their end, including profit margins, whereas DECC believes the UK market average for this component is almost double, at 19 per cent.

The energy regulator Ofgem’s market snapshot for October 2013 has the net margin on an average £1,315 bill at £60, or 4.6 per cent. SSE’s target for the medium term is a 5 per cent margin, but its actual profits have dropped below this in recent years.