Decoding your energy bill
“Let’s talk about your electricity bill”! Fun, right? Yeah, we thought so.
A significant amount of your monthly income is spent on something that is invisible to you and has opaque pricing. This makes it very difficult to appreciate and make smart choices about. By understanding your home energy bill, you can start your journey towards better energy behaviour; not only to save your wallet but also our planet.
It’s hard to have an intuitive understanding of kilowatts and kilowatt hours. The price of electricity changes over time, therefore you rarely know the price you are paying every moment — even with your energy bill in hand, it takes a lot of cognitive effort to understand what you actually paid for your last month’s electricity. Don’t panic! Watty is here to equip you with all the tools and insights you need to get started!
Basically, what you pay for is the electrons powering your appliances, the transport of those electrons from the power plant to your home, and the taxes and renewable subsidy fees on top of all that. There are usually three separate companies that make sure the microwave is heating your pizza:
- A grid operator builds and maintains the “pipes” that transport the electrons from the power plant to your home.
- Someone generates electricity through either a traditional power plant or renewable energy like wind, solar and hydropower. They then sell the electricity to a spot market where buyers can bid and a price is determined.
- A retailer buys electricity on the spot market and then promotes and sells it to consumers for a competitive price.
To understand this better, let’s break down the price you pay for electricity to its typical components. This varies a bit from country to country, but in general the following categories are applicable:
- Retail price. What you pay your retailer is what they buy the electricity for on the financial market hub plus the operational costs and profit margin. This should be about 25% of your total bill. Since all the companies offer the exact same product, this is a very competitive market and energy companies generally struggle to differentiate in price.
- Grid tariff. The infrastructure for transporting electricity from the power plants to your home is very complex and require massive investment that the distribution companies need to get paid for. This usually has a fixed cost for the connection and a variable cost depending on your consumption. The grid tariff is usually a third of your total bill.
- Excise taxes. Many countries have a specific tax on electricity, whose main purpose is often to generate income to the government budget rather than to incentivise.
- VAT. Value added tax is imposed on electricity similar to most other goods in European markets.
- Subsidy schemes. To get away from polluting, climate-change-causing fossil power, different subsidy schemes have been implemented at different levels of governments to finance the deployment of renewable energy resources.
To illustrate, we can look at the typical electricity bill in Sweden and Germany. The retail price is somewhat lower in Sweden, which has a lot of cheap hydropower. Grid tariffs are a lot more expensive in Germany after recent huge investments made to adapt the grid to the energy system of the future. Since Germany also has more fossil fuels in their electricity mix, they have more aggressive subsidy schemes to incentivise a change towards a more renewable system. Much of this cost ultimately ends up on the bill for the consumers. The end result is that the typical German household pay 50% for the same product as compared to Swedish households.
This gives you an overview of what happens behind the scenes when you turn on the lamps and a better understanding of what you pay and to whom you pay.
We hope this article gives you a perspective on how your electricity bill is determined. If you want to become a more “enlightened” energy consumer and understand how you use your energy in your home, you can learn more about how Watty uses artificial intelligence to break down your energy bill to appliance level at watty.io.
This article was written by Gustav Gårdbro, head of Sales and business development at Watty