Why is the cost of energy so high? And other commonly asked questions

Why is the cost of energy so high? And other commonly asked questions

By: Shell Energy

18 May 2022

With so much happening in the energy market right now, our customers are understandably keen to know more. We want you to feel informed and supported all the way, so here are answers to the questions you’ve been asking us lately.

Why is the cost of energy so high?

Rising energy prices have hit households across the UK, Shell Energy customers included. There are a number of reasons wholesale energy prices have increased around the world. These include high demand in Asia, and the ongoing situation in Ukraine.

As a supplier, we were buying energy at a much higher price than the price cap allowed us to sell it for. That’s why Ofgem, the UK’s energy regulator, has increased the level of the price cap. The price cap is calculated by Ofgem to reflect a fair price, based on the true costs of supplying UK homes with gas and electricity, and also to protect you as a customer. You can read more about it in our blog.

If all Shell Energy’s electricity is renewable, why have my prices gone up?

Here at Shell Energy, all our electricity is 100% renewable as standard.

To ensure this, we buy Renewable Energy Certificates of Origin. These guarantee that, for every unit of electricity you use, we match it with a unit of renewable electricity put into the grid. This renewable electricity comes from generators that produce energy using sources like wind, solar and biomass.

Like all energy suppliers, we rely on the National Grid to transport electricity into your home. The grid mixes energy from renewable and non-renewable sources. When demand for renewables is greater than supply, the grid tops up using other, non-renewable sources.

At the moment, around 40% of the UK’s electricity comes from renewable sources, leaving the rest to come from other sources, such as nuclear power, or burning fossil fuels. When prices for non-renewable electricity rises, it means that the price of wholesale electricity increases across the board.

This is why it’s so important that the UK generates more electricity from renewable sources. That way our electricity will be less vulnerable to changing gas prices.

Are suppliers profiting from higher energy prices?

You might assume that rising energy bills mean bigger profits for your supplier, but, in fact, less than 1% of your energy bill is profit. As Ofgem’s figures show, some 99% of costs are outside of our control.
Dual Fuel Bill

Source: https://www.ofgem.gov.uk/publications/infographic-bills-prices-and-profits

Wholesale energy costs account for around 35% of your bill, and there are also things like network costs (pipes, wires, etc), operating costs, taxes, and VAT to consider.

This means that, when the markets change significantly, our prices need to adjust as well. We work hard to keep our costs low so we can absorb as many of these costs as possible. But, unfortunately, the latest increase in wholesale prices has been so significant, we had to increase our rates in line with the new price cap.

What can be done about rising energy costs?

We want to support you as much as we can to use less energy. That’s why you’ll find plenty of energy-saving advice on our website and blog. We’re also committed to helping those less able to pay, so we’ve created a support hub, where you’ll find details of the help we can offer.

The rise in energy prices shows how important it is that we change the way Britain’s homes are heated and powered, and transition to net-zero carbon dioxide emissions. As we move towards low-carbon heating solutions in UK homes and generate more electricity from renewable sources, the UK will become less reliant on gas and less vulnerable to changing gas prices.

Learn more about how we’re powering progress to net-zero.

Are you offering fixed tariffs?

Rising wholesale energy prices mean that our flexible (standard variable) tariff currently represents the best value for our customers. That means we don’t have any fixed tariffs available right now.

But we’re closely monitoring the situation and will be in touch as soon as we start offering fixed tariffs again.

What is a standing charge, and why has it increased?

A standing charge is a fixed daily charge for supplying your home with energy. It includes the fees we have to pay the companies who own the wires and pipes that transport your energy. The recent changes to the energy price cap have affected the standing charge, as well as the unit price of your energy. Here’s why:

The companies who own the pipes and wires that transport energy to your home normally split their fees across the standing charge and unit rate. They tell suppliers like us how much we need to pay them each day (a cost we include in your standing charge) and also the fee per usage (which we add to the unit rate). When Ofgem, the UK’s energy regulator, reviewed the price cap, many of those costs were moved from the unit rate onto the daily standing charge.

On top of this, the amount we pay the network companies is increasing. This is driven by two factors: the cost of maintaining the network has gone up, and there’s an extra amount payable to recoup the costs associated with the collapse of 29 energy suppliers this past year. This is why your standing charge is going up, while increased wholesale prices have seen the unit rate rise, too.

It’s worth noting that there are different network companies across the country serving different regions. Each company sets its own charges, which means there isn’t one, universal set of rates – prices vary between regions. Ofgem has published an average, but this will be different to the rate you pay, which will depend on where you live.

Why is the standing charge for some customers higher than the averages Ofgem has published? 

How much you pay for your electricity standing charge will depend on where you live. This is because the cost of maintaining the network varies between regions.

The average price – as shown on Ofgem's website– is 45p, but this means that some regions pay less (in London it’s 32p), while others pay more (in the South West, it’s 51p) to reflect the differing network costs of serving those areas.

For gas, there’s just one standing charge.

How can I lower my energy bills?

Here are some ways you can save money on your energy bills:

Pay by Direct Debit

Having a Direct Debit in place will save you money, as well as helping you spread the cost of your energy.

If you’re on a fixed tariff and pay by Direct Debit, you can save up to £48 per fuel, per year. If you’re on a standard variable tariff, your savings will vary as rates are applied against standing charges and unit rates.

Get a smart meter

If you haven’t already done so, have a smart meter installed. Smart meters let you see your energy use in pounds and pence, helping you to make smarter, energy-conscious decisions. This stops you wasting energy, which will lower your bills and your carbon emissions, too.

Having a smart meter means no more estimated readings – you’ll be billed for exactly how much energy you used during the billing period.

Send regular meter readings

If you don’t have a smart meter, you’ll need to send us monthly meter readings via your online account, or the Shell Energy app. That way you’ll receive accurate bills, and only pay for the energy you use.

Take control of your energy use

We want to help our customers use less energy. That’s why you’ll find plenty of energy-saving advice on our website and blog.

I can’t afford my energy bill, what should I do?

We’re committed to giving our customers a helping hand when they need it most. If you’re struggling to pay your energy bill, please visit our support hub, where you’ll find details of what solutions we can offer.

The most important step you can take is to get in touch with our dedicated team. Once you’ve explained your circumstances, we can talk you through the ways we can help.

Find the most convenient way to contact us.

Why has my Direct Debit increased more than the price cap increase of 54%?

Calculating your Direct Debit requires careful consideration, and takes into account a number of factors. These include your past energy use, tariff rates, predicted future energy use, and the outstanding balance on your account.

The average increase for our customers who are in credit is currently 39%, which is less than the price cap increase of 54%.

For some customers, the increase will be higher than average. This will be a result of the factors that go into our calculation – for example, they may use more energy than average, or have an outstanding balance on their account.

We’re always happy to discuss your Direct Debit calculation with you, and reassess it based on your current circumstances.