What costs make up an electricity bill?

This page is a short summary of the full PDF briefing What costs make up an electricity bill?

Electricity prices increased steadily between the early 2000s and 2021. This trend was disrupted by the 2022 energy crisis, which created a very sharp increase in prices. While electricity prices subsequently fell, they still remained well above their pre-2022 levels.

Since the beginning of the US/Israel–Iran conflict in February 2026, oil and gas supplies have been disrupted and energy prices have risen again. The disruption didn’t affect domestic energy bills under the second quarter (Q2) 2026 energy price cap, but is expected to lead to higher prices under the Q3 2026 cap.

How are household electricity bills calculated?

Typically, household energy bills are made up of a unit rate for each kilowatt hour (kWh) of electricity used, and a daily standing charge. A household’s energy bill is calculated by multiplying the unit rate by the amount of electricity used and adding the daily standing charge.

The amount that households pay for unit rates and standing charges depends on their tariff. Most households are on default electricity tariffs, also known as standard variable tariffs (SVTs). SVTs are subject to the energy price cap.

The energy price cap

The energy price cap sets a maximum unit rate and standing charge that suppliers can charge consumers, and is set each quarter by the energy regulator, Ofgem.

Under the April to June (Q2) 2026 energy price cap, the average bill for a direct debit customer with typical annual electricity consumption will be £875.

The energy price cap is intended to reflect the costs faced by suppliers and account for the costs associated with different parts of the electricity system, which are set out below.

Source: Ofgem, Energy price cap (default tariff) levels, annexes 2, 3, 4 and 9

Wholesale costs

‘Wholesale costs’ refers to the price that suppliers pay generators for electricity. Wholesale costs are passed on to consumers and are the largest single element of household electricity bills.

Under the Q2 2026 price cap, wholesale costs made up £333 (38%) of the price cap for direct debit customers with typical annual consumption.

The wholesale market is where electricity producers sell electricity to electricity generators, and it is the main determiner of wholesale costs.

Suppliers purchase electricity from generators in the wholesale market using a variety of trading mechanisms and over a range of timescales, from years in advance to days or hours in advance.

Short-term electricity auctions are an important part of the wholesale market. They operate using ‘marginal pricing’ where the most expensive source of electricity sets the price for all electricity that is traded in them. As gas-fired generation is often the most expensive source of electricity that is traded in these auctions, the price of electricity is heavily influenced by the cost of natural gas and carbon price, even as the amount of electricity generated using gas decreases.

Wholesale costs also include costs associated with the Contracts for Difference (CfD) scheme, which supports large-scale renewable energy generation, and the Capacity Market, which supports secure electricity supply.

Wholesale costs rose more than tenfold between early 2021 and early 2023, as illustrated in the chart below. Wholesale costs subsequently fell again, but by early 2026 they were still around 88% above summer 2017 levels. The 2026 US/Israel–Iran conflict has again increased wholesale energy prices, but these are yet to be reflected in the price cap.

Source: Ofgem, Energy price cap (default tariff) levels, annex 9

Network charges and balancing costs

Overall network costs comprise charges for infrastructure and balancing services.

Infrastructure charges

Under the Q2 2026 price cap, network infrastructure charges made up £214 (23%) of the price cap for direct debit customers with typical annual consumption.

These charges fund the maintenance of and upgrades to the electricity transmission and distribution networks and are recovered through a mix of the unit rate (pence per kWh) and the daily standing charge, which suppliers bill to customers. Suppliers then use this revenue to pay regulated network charges set for the transmission and distribution systems (and to pay balancing costs; see below).

Variations in the costs of electricity across Great Britain’s 14 electricity-supply regions are largely due to differences in the distribution element of network charges. These are for costs of the low-voltage network and paid to distribution network operators.

Balancing costs

Under the Q2 2026 price cap, balancing costs made up £42 (5%) of the price cap for direct debit customers with typical annual consumption.

Balancing costs cover the actions that the National Energy System Operator (NESO) takes to balance supply and demand second-by-second. These costs have risen recently due to network constraints, which NESO has addressed by paying generators (typically wind generators) in constrained areas of the electricity network to reduce output and paying generators (typically gas generators) closer to demand to increase output.

Policy costs

Under the Q2 2026 price cap, policy costs make up £78 (9%) of the price cap for direct debit customers with typical annual consumption.

Policy costs on bills fund government schemes, which support the deployment of low-carbon energy generation and vulnerable households with energy costs and energy efficiency improvements. The Renewables Obligation will still be the largest single policy cost in Q2 2026, despite the government shifting 75% of the policy’s costs from bills to general taxation.

Other costs include those to support the Feed-in Tariff scheme for small-scale renewable generation, the Warm Home Discount for vulnerable customers and the Energy Company Obligation, which funds energy-efficiency measures.

Operating, debt and industry costs

Under the Q2 2026 price cap, the operating, debt and industry costs make up £141 (16%) of the average bill for direct debit customers with typical annual consumption.

Core operating costs, such as billing, metering, and customer service, are £97 a year for a direct debit customer, with higher allowances for standard credit and prepayment customers.

The allowance for bad debt covers the cost of customers who cannot pay their bills. Debt‑related costs are currently £26 a year for direct debit customers, with higher allowances for standard credit customers and lower allowances for prepayment customers.

Industry costs cover the charges that suppliers are required to pay to various industry bodies.

Non-consumer bill costs

There are energy system costs that do not appear directly on household electricity bills but still form part of the wider cost of producing, regulating and decommissioning electricity in the UK.

These include fossil fuel related costs that are met through general taxation or through tax relief provided for decommissioning activities, as well as government support for building new nuclear plants, managing legacy waste and decommissioning.

Possible future trends in prices

Increased renewable capacity over the next decade could lead to a fall in the share of a bill made up by wholesale costs. However, other costs, including network and policy costs, are projected to increase to support the transition to a net zero energy system. The Climate Change Committee’s Seventh Carbon Budget predicts that household energy bills will gradually start to reduce after this (it projects that the bill for a household with average consumption will be around £940 a year in 2050, compared with £1,650 in 2025 (in 2023 prices)).

For more information on short-term trends, see the Commons Library briefing Economic update: Middle East conflict and the UK economy. The long-term effects on consumer bills of the 2026 US/Israel-Iran conflict’s disruption of the global oil and gas markets are currently unclear, with research focused on energy system risks.

Scope

This briefing explains the component costs of a domestic electricity bill in Great Britain, how those components have changed over time, and how they may evolve. It also covers selected wider energy system costs that sit outside consumer bills (for example, costs funded from general taxation) and provides high-level international context.

The briefing does not cover Northern Ireland, which operates under a separate electricity market on the island of Ireland. For information specific to Northern Ireland, see the websites of the Northern Ireland Utility Regulator and the System Operator for Northern Ireland.

The briefing focuses on bill and system cost components only. Wider societal costs of generation (health, environmental and other externalities) are not included.

Local area data

The tables in the briefing Gas and electricity prices during the ‘energy crisis’ and beyond give breakdowns of the current and upcoming price caps by energy supply region and payment method. A separate price cap is set for each of the 14 regions and applies throughout the region. This means there is no further geographical breakdown of prices or typical bills below regional level.

Further information

The Library briefing Gas and electricity prices during the ‘energy crisis’ and beyond looks at trends in prices under the energy price cap, details of government support for households during the 'energy crisis', how prices in Northern Ireland compare to the rest of the UK and forecasts of prices under future energy price caps.

Readers may be interested in the following related briefing papers from the House of Commons Library and the Parliamentary Office of Science and Technology briefing :

• Introduction to the domestic energy market
• Contracts for Difference Scheme
• Contracts for Difference and the economics of renewable energy deployment
• Energy standing charges
• Help with energy efficiency, heating and renewable energy in homes
• Help with energy bills
• Demand side response: A tool for lowering household energy bills