Fact-check

What's driving up your fuel bills? (EDF special)

Richard George
License: All rights reserved. Credit: Greenpeace

This morning, EDF Energy announced that it was increasing standard variable prices for gas and electricity residential customers by 10.8%. It was the fourth of the Big Six energy companies to do so in the last fortnight, Scottish and Southern announced increases in August and E.on is expected to increase its prices before the end of the year.

In today's announcement, EDF said that the "costs associated with the implementation of obligatory renewable, energy efficiency and social schemes" had risen by more than 50% in the last year. They also pointed to increases of 9% in distribution and transmission costs and wholesale energy prices rising by 4%. With statistics like that, it's not surprising that many people blame energy efficiency schemes and other green taxes for the price increases.

Talking in terms of relative changes in price can be misleading if one cost is smaller or larger than the other. So how does a 50% increase in environmental and social costs compare with a 4% rise in wholesale prices? In other words, are green taxes to blame for your sky-high fuel bill?

We don't have as much data as I'd like, but what we do have suggests that EDF's percentages don't tell the entire story. Let's start with their funky infographic that breakes down their electricity and gas bills into five components: VAT, social and environmental costs, operating costs, delivery costs and wholesale energy costs.

(Infographic (c) EDF Energy)

As you can see, wholesale energy costs make up the largest chunk, at 51% of gas bills and 48% of electricity bills. Social and environmental costs are the smallest component of your gas bill and the second smallest of an electricity bill.

So how do these cost increases affect each of the components? For the purpose of these calculations, I'm assuming that your bill is £100, because EDF has expressed the components in percentage terms. I'm also assuming that the percentage change is the same for gas and electricity bills.

 Cost in pounds
Change in percent of orginal value
New valueChange in poundsPercentage of price increase
VAT
50%500%
Social / eco costs450%6237%
Operating costs
159%16.351.35
25%
Delivery costs
250%25
0
0%
Wholesale energy costs
514%53.042.0438%

 

So for gas bills, a small rise in wholesale prices is the same as a massive rise in environmental costs. What about electricity bills?

 Cost in pounds
Change in percent of orginal value
New valueChange in poundsPercentage of price increase
VAT
50%500%
Social / eco costs850%12454%
Operating costs
179%18.531.53
21%
Delivery costs
220%22
0
0%
Wholesale energy costs
484%49.921.9226%

 

For electricity bills, the increase in cost of the social and environmental component makes up just over half of the total increase. So it's true that if you are an EDF customer, then green taxes and charges are the main reason why your bill has just gone up. These charges are still a very small proportion of your bill though, even if that portion grew quickly this year.

Obviously this is back-of-fag-packet calculus, and it would be much more helpful if we had the actual figures and a breakdown of the various elements of the social and environmental components and how each had changed over the past year.

Finally, it's interesting that EDF talks of an increase of 50% for social and environmental costs, because that is higher than the other companies are claiming. Scottish Power said its social and environmental costs had increased by 34%. npower also cited a 50% rise, but from 2011 to 2013, which I assume to mean 25% per year. It isn't clear why EDF's environmental costs are rising by so much more than its competitors, although I would love to know why.

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Most of the environmental and social costs are not a fixed price set by Government, but obligations that EDF have to meet in saving carbon and improving energy efficiency. The requirements are set out over multi-year periods, so one way in which utilities can see a rise in these costs is if they underperform in the early part of the period and have to catch up towards the end. The overall cost of such programmes will also be affected by whether they are efficiently run or not.

I have no idea whether EDF have backloaded their programmes, or are running them worse than the other companies - but there is a danger that they are presenting the figures in this way to keep the heat off themselves.

 

 

What I would like to know is what happens to us all when gas, shales and the cost of repairing wind turbines is no longer able to be sustained? Do we all go back to having fires in our gardens to cook the food we have caught and killed ourselves because battery and other indoor farms can no longer be heated or there isn't any energy to see in buildings. 

The marketplace forces of supply and demand determine the price of fuel. If demand grows or if a disruption in supply occurs, there will be upward pressure on prices. By the same token, if demand falls or there is an oversupply of product in the market, there will be downward pressure on prices.

Those principles apply at the service station level as well. If a retailer prices its gasoline too high, and without regard to competition, the retailer's customers may take their business to another station with lower prices. If a retailer loses enough volume, the retailer may then reduce prices in order to retain its customers.

Competition among retail outlets thus affects pricing. You may notice that sometimes there are price differences between two gasoline stations on a busy street corner and between those outlets and the only station on a long stretch of highway. More choices generally mean more competition for business.

Sheila Johnson, http://www.drugandalcoholtest.com/

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