Our price tracker

As part of SSE’s Building trust initiativewe promised to publish an online 'tracker' showing the relationship between the different components of a typical dual fuel energy bill. The tracker shows the changing components of bills with the aim of explaining the rationale for our pricing decisions. 

The tracker uses externally sourced data and we update it every three months. 

What parts of the bill does the tracker cover? 

 There are a number of costs which we have to cover in our charges to customers. These include: 

• Wholesale energy – Suppliers have to secure electricity and gas through the wholesale electricity and gas markets, and through bilateral contracts with electricity generators and gas producers. To secure the gas and electricity they need, suppliers will generally buy some of their energy ahead of time. If suppliers feel they will get a better deal for customers by buying ahead, they may buy up to three years in advance on forward markets. These markets are influenced by various factors, including geopolitical issues. Other wholesale energy costs include the cost of keeping electricity and gas systems balanced between supply and demand. 
• Use of system (UoS)  charges – Suppliers have to pay electricity and gas network companies for transporting energy along their wires, cables and pipes to the meter. The cost of using the networks is controlled through a regulatory formula managed by the industry regulator, Ofgem.  
• Government-sponsored schemes – The cost of government-sponsored environmental and social schemes is recovered from customers through energy bills. These schemes include: Carbon Emissions Reduction Target (CERT), Community Energy Saving Programme (CESP), Warm Home Discount (WHD), Feed In Tariff Scheme (FITS). They also include the cost of Renewable Obligation Certificates (ROCs) and the estimated impact of the European Union Emissions Trading Scheme (EU ETS) 
• Supply costs – Other supply costs include billing, customer service, metering, IT systems, bad debt, sales, marketing and other corporate costs. 
• VAT - Value added tax levied at 5% by the government. 

The tracker also shows our estimated margin for the year ahead based on current market information.

Anything else I should know before I look at it? 

The whole graph is a 'forward looking' view. Each point shows the energy cost issues relating to a customer as if they had signed a contract running for one year starting from the following month. Therefore January 2012 figures reflect the issues in respect of a customer from February 2012 through to February 2013.  

The cost outlook is designed to reflect the expected path of costs. It examines the forward markets for electricity and gas and known future changes to other costs. For illustrative purposes, these costs are shown against the current level of the tariff. 

What the tracker is showing 

The graph shows how market-based costs and prices have evolved since January 2004 for a typical domestic dual fuel customer paying by Direct Debit. Our typical customer uses 3,887 kWh of electricity and 14,707 kWh of gas a year.

Looking backwards, the trends from the last eight years are:

• Wholesale prices have been volatile and have doubled.
• Retail prices have followed wholesale prices. Their movements have a slight lag after the wholesale price, reflecting the fact that companies buy energy ahead of customers using it.
• The costs of government-sponsored schemes and network (UoS) costs have increased significantly, adding to the cost of bills.
• Margins have varied, being both positive and negative at different times. Over the period since January 2004, the margin estimated on this basis has been -£13.50. Over the 12 months to March 2012) the margin is an average of £82.70.

Looking forward over the next two years, our observations are:

• The forward price of energy is higher in the future than it is today
• The costs of government-sponsored  schemes and network (UoS) costs continue to rise
• Margins are on course to drop
• We have promised not to increase our energy prices before October 2012.

The wholesale market cost is a forward-looking indicator while the accounts of the supply business will reflect the costs of past contracts.

Demand  

The size of a customer's bill is not just determined by the movements in prices. It also depends on the amount of energy actually used. The graphs below show customers have benefited from using less electricity and gas. Improvements in the energy efficiency of household technology and improved home insulation levels are important factors behind these trends.

The effect of this should not be underestimated. Using current tariff prices, bills would be £277 higher if customers continued to use the same amount of energy as they did in 2005.

Interestingly, much research into the relationship between wholesale and retail prices ignores the impact of reduced demand. This leads to an overestimate of profits as margin is attributed to sales that never happened.

The graphs show data for SSE customers.