Are you aware that the amount you pay for your energy depends on which region of the UK you’re based in? A household in London may use the same amount of electricity as a household in Yorkshire, but they’ll end up paying very different amounts for their energy. Find out why the cost of energy varies from region to region and whether you’re living in a hotspot for higher gas and electric prices.
It’s referred to as the “postcode lottery” – different energy rates for different areas of the UK. For example, electricity prices per kWh might be 15.15p in Birmingham, while energy prices in London could mean that the same unit of energy comes out to around 16.52p. But isn’t all energy the same? Well, yes and no. There are multiple reasons why the cost of energy varies from region to region, but generally, it comes down to four key factors:
One of the key drivers of differing regional energy prices is simply supply and demand. If your region has relatively few people, then electricity prices per kWh are driven up. However, suppliers can buy in bulk for densely populated areas, which reduces the cost of energy in those regions.
As you can imagine, different regions of the country have different demands when it comes to energy. In colder regions such as Scotland and the North East, energy customers are more likely to use more of their electricity to heat their homes. This is factored into the gas and electric prices set by the energy supplier.
For a fee, your region’s distribution network assists suppliers with distributing energy. Because the main 14 local networks are owned by six different companies, each company is likely to charge suppliers a different fee, which can lead to varying energy prices across the country.
In order to provide you with energy, suppliers purchase that energy from generators in the local area. However, these purchases are made in advance based on sometimes inaccurate estimates about customer demand. If more energy is needed at short notice, the cost of energy may be driven up due to a spike in prices.
So, now you know why energy prices in London may differ from gas and electric prices in Yorkshire, how do the regional costs of energy actually work out? According to figures from Ofgem, annual domestic bills for gas and electricity in 2018 broke down as follows:
North Scotland – Average gas/electric bills are around £1,376
London – Average gas/electric bills are around £1,362
South East – Average gas/electric bills are around £1,350
Merseyside & North Wales – Average gas/electric bills are around £1,345
South Wales – Average gas/electric bills are around £1,340
Southern – Average gas/electric bills are around £1,332
Eastern – Average gas/electric bills are around £1,309
West Midlands – Average gas/electric bills are around £1,312
South Scotland – Average gas/electric bills are around £1,301
North West– Average gas/electric bills are around £1,300
East Midland – Average gas/electric bills are around £1,299
North East – Average gas/electric bills are around £1,288
Yorkshire – Average gas/electric bills are around £1,283
Of course, it’s important to remember that these are averages, so if you use substantially more energy than others, you’ll end up paying high energy bills, regardless of where you’re based in the country.
When it comes to gas and electric prices, North Scotland and London will put the greatest strain on your monthly bills. Costs in the South East, Merseyside & North Wales, and South Wales can also be high.
Overall, the North East and Yorkshire offer the cheapest energy prices, while South Scotland, the North West, and the East Midlands also offer excellent value for money.
According to those same Ofgem figures quoted earlier, the average cost of gas in the UK comes out to around £664 per year, while the average price of electricity is slightly higher, at around £666 per year.
Electricity is supplied through energy suppliers and Distribution Network Operators (DNOs). There are 14 DNOs, each of which serves one of the 14 geographically defined regions of the UK. Energy suppliers will use these DNOs to provide customers with electricity, and while each network sets prices, there are regulations to stop overcharging, as this would lead to electricity prices per kWh rising for the customer.
Gas is supplied through a local distribution network by energy companies. There are eight Gas Distribution Networks (GDNs) across the UK, and as with DNOs, there are regulations to stop GDNs from abusing their monopoly to charge suppliers too much.
At the top level, your monthly energy bill is split between the amount you pay for gas and the amount you pay for electricity. However, there are a wide range of different costs that make up different percentages of the bill, all of which vary slightly from region to region. Here’s a breakdown of what you’re actually paying for when you pay your monthly energy bills:
Wholesale costs (38%) – The largest proportion of your bill goes to wholesale costs, which is the cost charged to your energy company when it purchases electricity and gas.
Network costs (26%) – This covers the cost of delivering energy to your home from power stations, as well as maintenance for cables and pipes.
Operating costs (17%) – This covers the costs your energy supplier incurs during operating, such as customer service.
Environmental and social obligation costs (8%) – Energy suppliers are required by law to contribute a set amount of money to environmental initiatives. This portion of your bill is used to cover the cost.
VAT (5%) – This is a government tax that is charged on goods and services.
Supplier pre-tax margin (5%) – This is essentially the profit margin for your energy supplier, making up the difference between the cost of delivering energy and the amount that you and other customers pay the energy supplier. It also funds tax, debt payments, and other cost obligations.
Other direct costs (1%) – These include a range of different costs, including intermediary sales commissions and broker’s costs.
While you can’t exactly change your postcode – unless you were to move to a new house, of course – there are many ways that you can reduce your monthly energy bills. First off, check that you’re on the cheapest energy plan in your area. By switching to a more affordable plan, you can drive down your electricity prices per kWh and get the best value for money. Consider switching to an Economy 7 plan if you use a substantial proportion of your energy at night, and don’t be afraid to look at energy plans from smaller suppliers, as it is sometimes much more cost-effective to opt for these than plans from the big six energy suppliers.