Paying for electricity is something we all have to do, unless we want to live in the Dark Ages. However, most people won’t think twice about their energy bills, and will just pay what they’re told. But with so many energy suppliers operating in the UK, there can be a huge difference between the cheapest and most expensive tariffs.
Therefore, it’s hugely important to be in the know about the electricity market, average prices, and how much you should be paying. Otherwise, how would you know if you’re being ripped off?
In this guide, we’ll explain how the electricity market works in the UK, including who sets the prices, what causes prices to change, which suppliers offer the cheapest tariffs, and how to switch to a cheaper deal. If you haven’t switched suppliers in a while, you could save hundreds of pounds a year by comparing tariffs and finding a better plan.
What’s included in the price of electricity?
When you look at your bill, you will see that the cost of your electricity has been broken down into two parts – the standing charge, and the unit rate. Let’s take a look at what both these terms mean:
- Standing charge: This is a set daily charge that goes towards the maintenance of the network used to distribute your electricity.
- Unit rate: This is the amount you’re charged for each kilowatt-hour (kWh) of energy used.
Together, the standing charge and the unit rate make up the cost of your electricity. So, what you pay is not only for the amount of energy used, but also for the number of days you have been receiving electricity.
That being said, no standing charge tariffs do exist, in which you’re only charged on the electricity you use. However, these typically have higher than average unit charges, so they won’t necessarily work out cheaper in the long run.
Who sets the price of electricity in the UK?
Energy prices in the UK are set by suppliers, within limits. Because each supplier can set their own prices for the electricity they sell, you will see huge variations in the overall costs of tariffs when you compare deals.
However, gone are the days when energy suppliers could charge whatever they liked. At the beginning of 2019, the energy regulator Ofgem introduced what’s known as the energy price cap. This sets a limit on the amount any supplier can charge an average household.
The price cap was introduced in order to prevent energy suppliers ripping off their customers, but it is reviewed twice a year and can be adjusted to reflect changes in wholesale prices. It also only applies to customers on either standard variable tariffs or prepayment tariffs – if you’re on a fixed tariff, then the price cap doesn’t apply to you.
Also, the price cap doesn’t mean that you won’t be charged over a certain amount each month. The price cap refers to the maximum amount suppliers can charge per kWh of energy used. So, the more electricity your households consumes each month, the higher your bill will be.
How are electricity prices determined?
The price of electricity that is set by a supplier is based on a number of factors, but is primarily determined by wholesale costs. The wholesale cost is the price suppliers pay to source their electricity.
The energy market is a highly volatile one, and wholesale costs of electricity constantly fluctuate due to a number of global influences. These include:
- Economic factors including disruption to supply lines and inflation
- Political factors including war and sanctions
- Environmental factors including scarcity and natural disasters
While energy suppliers will typically use global factors as an excuse to hike their prices, positive influences on the market can often result in lower electricity bills for you, too.
As well as wholesale costs, market competition is also an important driver of electricity prices. The market share of domestic energy supply in the UK is dominated by the Big Six (British Gas, EDF, E.ON, npower, Scottish Power, and SSE), so these companies have particular power when it comes to setting electricity prices.
Typically, when one of the Big Six raises or lowers its prices, the others will follow, including smaller, independent energy companies. In fact, these smaller suppliers will often try to undercut the Big Six in order to attract customers, so you’ll invariably find that they offer some of the cheapest tariffs.
Average electricity prices in 2021
According to the Department of Business, Energy & Industrial Strategy, the average unit cost of electricity was 14p per kWh during the first quarter of 2021. Meanwhile, standing charges can be anywhere between 5p to 60p per day, depending on the supplier.
But what does this mean for your bills? How much should you be paying for your electricity each month?
According to government statistics, the average electricity bill in the UK was £707 per year, or £59 per month.
Remember that this is for the average household. If you live in a large 5-bedroom house then you should expect to pay more than this, while those living in a one-bedroom flat should be paying less, on average.
Average electricity prices also vary depending on which part of the UK you live in. For more information on average prices in your area, check out our page on average gas and electric prices in the UK.
If you believe you’re paying over the odds for your electricity, now is the time to compare tariffs and switch.
Are electricity prices rising?
In short, yes. While the electricity is market is notoriously volatile, meaning prices often go up and down, domestic electricity costs are generally rising year on year.
According to a report in the Guardian, average energy bills in the UK increased by 40% in just four years, between 2015 and 2019. Since the price cap was introduced, price hikes have been less steep, although average electricity bills still rose by a further 1.3% in 2020, according to government statistics.
2021, however, has seen even further increases in the price of electricity. Thanks to rising wholesale costs, the energy price cap was increased by 12% in October to its highest ever level, with the average household seeing a £139 increase in their annual bills.
If you’re on a standard variable or prepayment tariff and are thus affected by the recent changes to the price cap, switch to a fixed tariff now to avoid paying these higher rates.
Has COVID-19 had an impact on electricity prices?
The COVID-19 pandemic has caused unprecedented strain on global economies and supply lines, affecting almost every sector imaginable. The electricity market is no different, and the effects of the economic shutdown will likely be felt in the industry for many years.
Although demand for electricity fell to new lows during the height of the 2020 lockdown, thanks in part to offices and workspaces being left empty, global disruption to supply lines has caused wholesale prices of both gas and electricity to skyrocket. These rises in wholesale costs will, of course, be passed on to consumers.
For more info, head over to our page on how coronavirus is affecting energy prices.
Is Brexit affecting electricity prices?
Since the UK has left the European Union at the beginning of 2020, many have predicted that disruption to supply lines would result in an increase in domestic electricity prices. However, the economic impact of Brexit is still unfolding, and many effects may still yet to be felt.
That being said, the recent collapse of the energy market due to gas shortages in particular has been partially attributed to Brexit. However, electricity prices haven’t surged as much as gas prices yet, and this may be due to the fact that just 5% of the UK’s electricity is sourced from the EU, compared to 12% of its gas, according to the Department of Business, Energy & Industrial Strategy.
That being said, some effects of Brexit are still being played out, and it’s not entirely certain what impact it will have on rising electricity prices in the future.
What happens if my energy supplier raises its prices?
Energy suppliers can raise their prices mid-contract, and they often do, although they must give you reasonable notice of any price increases. If you feel like you weren’t given enough time then you should complain to your supplier.
However, if you’re on a tracker or staggered tariff, then price changes are expected mid-contract so you will have no basis to make a complaint.
If you’re on a fixed rate tariff, the price you pay for your electricity should stay constant throughout the duration of your contract, although it’s wise to keep an eye on your bills. You should also be aware of when your contract is ending, as when it does you’ll likely be placed on your supplier’s default variable tariff, which are typically much more expensive.
If you feel like you’re paying too much for your electricity, the best thing to do is switch to another supplier or tariff. You can compare energy suppliers with usave and switch to a cheaper plan today – the switching process shouldn’t take more than 3 weeks.
Which supplier has the cheapest electricity?
Energy tariffs are constantly changing, so there’s no simple answer to which company offers the cheapest electricity in the UK. That being said, some suppliers are certainly are better bet than others.
For example, the Big Six energy companies often have some of the most expensive tariffs on the market – so stay away from these if it’s cheap electricity you’re after. On the other hand, smaller energy suppliers such as Octopus, Bulb, and Outfox the Market have been known to undercut the Big Six, and many of the cheapest tariffs on the market are offered by these types of firms.
For more information on which electricity supplier is the cheapest, check out our page on the best and worst energy suppliers in 2021.
How can I find the cheapest electricity tariffs?
The easiest way to get cheaper electricity and save money on your bills is to compare energy tariffs and switch. And that’s where we can help.
Comparing electricity tariffs with usave is quick and easy. To start, all you need to is enter your postcode and provide a few basic details about your current provider and energy usage. You will then be presented with a list of quotes from a range of energy suppliers.
Simply choose one which suits you and we’ll do the rest. You don’t need to tell your current provider about your switch, just sit back and relax and wait for your account to be switched over – it should take no longer than 3 weeks.