Many people assume that the price they pay for each unit of electricity is simply the cost of generating electricity. In reality, this is only part of the story.
The current electricity unit price combines the cost of buying electricity with a wide range of other charges, including network costs, government policies, supplier operating costs and VAT. Most consumers have little visibility of what they are actually paying for because these costs are bundled together into a single price.
The interactive chart below breaks down the current average electricity unit price into its individual components using Ofgem’s detailed price cap methodology.
What the Chart Shows
The largest element of today’s electricity bill is the wholesale cost of purchasing electricity, accounting for approximately 13.75p of every 26.11p paid for each kilowatt-hour.
The remaining 12.36p does not pay for generating electricity. Instead, it funds electricity networks, supplier operating costs, government environmental and social policies, supplier profit allowances, regulatory headroom and VAT.
This means that less than 53% of the electricity unit price actually pays for the electricity itself. Almost half of every unit purchased is made up of other costs that have been added to the bill over time.
Why This Matters
Combining every cost into a single unit price makes electricity appear significantly more expensive than it really is.
Consumers cannot distinguish between:
- the cost of producing electricity,
- the cost of maintaining the electricity network,
- government policy decisions,
- supplier operating costs, and
- taxation.
As a result, many people incorrectly believe renewable electricity is expensive, when much of the price they pay has nothing to do with generation.
The Policy Seed Approach
Our proposal separates these costs to create a far more transparent electricity market.
Under our proposed tariff:
- The 15p unit price pays primarily for wholesale electricity and a simple, transparent supplier margin.
- The monthly Network Access Charge funds the operation and maintenance of local electricity networks instead of hiding these costs inside every unit consumed.
- National infrastructure projects, such as new high-voltage transmission lines and strategic grid upgrades, are funded through general taxation where the cost can be shared fairly across society and financed over many decades.
- Government environmental and social policies are removed from electricity bills and funded through general taxation, ensuring that policy decisions are debated openly rather than hidden within household energy bills.
- The Electricity Resilience Fund provides protection against exceptional wholesale price shocks, allowing unit prices to remain stable during periods of unusually high global energy prices.
A More Transparent Electricity Market
The objective is not simply to reduce bills.
It is to create an electricity market where consumers can clearly see what they are paying for and why.
Electricity should be priced according to the cost of generating electricity. Network infrastructure should be funded transparently. Government policies should appear in government spending. Exceptional market shocks should be managed through a dedicated resilience fund rather than passed directly onto households.
By separating these different costs, consumers gain a clearer understanding of their bills, suppliers operate within a simpler pricing framework, and policymakers can make infrastructure and spending decisions in a more transparent and accountable way.