Friday, 14 March 2014

Understanding electricity tariffs

Which? says the new electricity and gas tariffs are still too difficult for consumers to understand. The new tariffs are based on a fixed charge per unit plus a standing charge. They give examples of three tariffs from Npower, SSE and British Gas and say it is hard to work out which is the cheapest because you need to do some arithmetic and also you need to know how much electricity or gas you use in a year [1]. Well the arithmetic is easy and knowing your annual use would be too if it was on your bill - but it isn't necessarily there.

My bill from Good Energy does give my last twelve months consumption (though annoyingly the last one said 'not enough information' presumably due to them having changed their billing system and not transferred the old data across). However, according to the BBC's analysis of Ofgem's proposals [2] your bill will include elements as follows:

Comparison of this quarter's consumption with the same period last year This is helpful to see if you are using more or less compared to last year but does not help with calculating costs
Prediction of annual cost if you continued use at the same rateThis is useless information because you won't - both gas and electricity use varies with the seasons
Tariff comparison rate which is the equivalent p/kWh for a typical low/medium/high user This is helpful if you know where you are on the low/medium/high user scale but not otherwise

The one piece of information they don't seem to require is the one you need to interpret the tariffs - your 12 months usage.

By the way, the following graph shows the three tariffs in the example from Which? They converge at about 2000 kWh/year which is a very low user. The average is 3500 kWh/year

Npower: Standing Charge: 0p per day. Unit Rate: 17.105 p/kWh
SSE: Standing Charge: £60 per year. Unit Rate: 13.99 p/kWh
British Gas: Standing Charge: 26p per day. Unit Rate 12.27 p/kWh

Which? are campaigning for a fixed rate with a no standing charge. However this does not reflect the costs of the service provided because a large part of these are in the supply infrastructure and are fixed regardless of how much electricity you use. Even if you use only 1000 kWh/year you still need a cable into the house, or a pipe for gas. The comparison they make with petrol stations is not relevant. The gas station infrastructure costs are the same if they have 100 customers using 100 liters/week or 1000 customers using 10 litres/week.

On the other hand, a fixed rate with no standing charge would benefit people with low use who are often on low incomes and penalise people who use a lot, who might be unnecessarily profligate. I would support a move like that on the grounds of social benefit, but not simply to avoid doing a bit of arithmetic.

[1] Energy bills 'still confusing', says Which? (BBC Mar 2014)
[2] Fuel bills and tariffs: Ofgem's proposed changes (BBC Oct 2013)


  1. This comment has been removed by the author.

  2. Just to repeat my earlier reply, but rather better edited!

    I think the case for a single, petrol-pump style price is very strong. I don't buy into the notion that utility companies are somehow unique because they have a lot of fixed costs. Every business has fixed costs. In fact, the utility companies benefit from having regular income streams which should make accounting for fixed costs simple.