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How do energy tariffs work?

Martin Lane Photo

Written by Martin Lane, Managing Editor

25 January 2019

Your gas and electricity tariff affects how much your energy costs, so picking the right one could save you money. Here is what you need to know about how your energy tariff works.

Woman adjusting thermostat

What is an energy tariff?

It is the way energy companies charge you for your gas and electricity. Energy tariffs can be based purely on price, or they can differ depending on where the energy comes from or how you manage your account.

Where does energy come from?

Gas and electricity are mostly generated in the UK by power stations, which run using:

  • Coal

  • Gas

  • Nuclear energy

Some energy is also created from renewable sources, like wind farms, solar power, and hydro power stations. This is called green energy.

Local distribution companies then supply gas and electricity to homes and businesses in the UK. Which company supplies your energy will be automatic based on where you live.

Who can supply your energy?

Energy suppliers pay distribution companies to sell energy on to you, and you can choose your supplier by checking what is available in your area.

The main energy suppliers in the UK are known as the Big Six, and they include:

  • British Gas

  • npower

  • EDF

  • E.ON

  • Scottish Power

  • SSE

There are lots of other smaller suppliers who can offer more competitive rates than the Big Six, so compare as many products as possible to make sure you get the best deal.

How can you find out who supplies your energy?

Is the energy market regulated?

Yes, the energy market is regulated by the Office of Gas and Electricity Markets (Ofgem).

Ofgem aims to protect consumer rights by encouraging competition between energy suppliers, promoting value for money and by handling complaints about poor service.

How is energy measured?

Gas and electricity are measured in kilowatt hours (kWh), which is equal to the amount of energy used if you run one kilowatt for an hour.

Your energy supplier will charge a unit rate for each kWh you use, which determines how much you pay for your gas or electricity.

You can monitor your energy usage by taking regular meter readings or you could ask your supplier to install a smart meter. This lets you track how much gas or electricity you have used and sends up to date meter readings to your supplier.

Should you get a smart meter?

How much will you pay?

It depends on how much energy you use, and which tariff you pick. It will also be affected by:

  • Where you live: The cost can vary depending on the region you live in. Search for energy deals using your postcode to compare tariffs available in your area.

  • How you pay: Certain payment methods, like monthly direct debit, come with a discount on the price of your gas and electricity.

VAT is also added to your energy bill to give a total price for your gas and electricity, but this is usually capped at 5%.

You should get a quarterly bill from your supplier which tells you how much you owe for your gas and electricity. You can avoid high estimated bills by providing regular meter readings to your energy company.

Find out how to read your energy bill.

What is a standing charge?

Your standing charge is a fixed cost you pay to your energy supplier for providing your home with gas or electricity. It also covers the price of:

  • Maintenance

  • Managing your account

  • Meter readings, if an engineer visits your home

All energy suppliers include a standing charge but some set this charge at £0, so compare energy tariffs to find the best deal.

Find out how to save on your gas and electricity.

What tariff can you get?

The main energy tariffs available are:

  • Fixed, which sets the price of your energy for a fixed period of time

  • Standard, which is variable in price but lets you cancel your contract at any time

  • Dual fuel, which offers discount for combining your gas and electricity with one supplier

  • Green energy, which uses a higher proportion of renewable energy

  • Online, where you manage your account online in return for a cheaper deal

Find out how to choose the right energy tariff.

How can you pay?

There are several different ways to pay for your gas and electricity, and picking the right one could help you save money:

  • Monthly direct debit

  • Quarterly

  • Payment card

  • Prepayment meter

Is a prepayment meter right for you?

How to manage your tariff

Once you have chosen an energy tariff, there are several things you need to do to make sure you keep your account running smoothly and avoid overpaying for you gas or electricity:

  • Give meter readings

  • Switch tariffs if yours is ending

  • Update your details

If you move home, you should also cancel your existing energy supply and set up your gas and electricity at your new address.

Find out how to manage your energy service.

Switching energy supplier

You could save money on your gas and electricity by switching supplier. Provided you do not leave a contract earlier than 42 days, switching is quick and easy.

Watch out for exit fees if you are tied into a fixed deal, as they can be as much as £30 per fuel.

For example, if you have both gas and electricity with the same supplier, you will pay £60 for cancelling your contract early.