Blog
Unit 1 Micro: Breaking Down the Cost of Gas
4th March 2012
High gas prices impact on millions of households whose energy bills have soared in recent years and have led to a steep increase in fuel poverty among lower-income families. Studying the market for gas is interesting from a micro-economic perspective and a recent article in the Times (covered by a paywall) provided an overview of the breakdown of the cost structure of a typical energy bill from suppliers such as British Gas
A standard gas bill breaks down as follows:
56% - the cost of gas bought from the wholesale market
21% - the cost of delivering gas to the home
10% - the cost of obligations imposed by government such as green levies / taxes
8% - other operating costs of British Gas
5% - profit
The UK gas supply industry is an oligopoly dominated by British Gas, EDF, E.ON, npower, Scottish Power, and Scottish & Southern.
Consumer Focus estimates that 6.5m UK households spend more than ten per cent of their household income on energy bills, which is defined as being in fuel poverty. In 2009, there were 5.5m households in the same position and gas companies have been heavily criticised for being quick to raise their prices when gas prices on the wholesale market head higher, but delay price reductions when world prices dip.
British Gas is the residential energy division of Centrica. In February 2012 Centrica reported annual operating profits of £2.4bn for 2011, up 1% on the same period in 2010
Related articles:
How do wholesale gas costs affect household energy bills?
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.