How to understand your energy bill

With energy bills soaring, confusion about how to actually interpret an energy statement is rife. Understanding what's going on in the energy market and how that affects your payments has never been more important.

High wholesale energy prices have pushed the energy regulator Ofgem to increase the price cap by 54% from 1 April 2022. For the majority of UK households this means a large jump in energy payments.

It's crucial to make sure you are paying what you should be, even with the higher tariffs now coming into effect.

Read on to decode the jargon found on your energy bill, including what the different types of tariffs are, what standing charges mean for you and what exit fees are.

Ease the squeeze: Find out how Which? can help you with the rising cost of living

What are energy tariffs?

An energy tariff is a combination of rates for gas and electricity usage, that when combined make up the amount you pay your energy provider.

The two most common types of tariff are fixed-rate tariffs and variable tariffs.

• A fixed-rate tariffsets the cost of energy for a certain amount of time - typically a year or two.
• Prices on variable tariffs can shift up or down according to what's going on with energy market prices.

Both fixed tariffs and variable tariffs provide a standing charge per day, and a unit rate per kilowatt hour (kWh) of either gas or electricity that you use. That means that if you increase the amount of energy you use, the amount you pay will go up, and conversely, decreasing your usage will reduce your bills.

Variable energy tariffs

You'll see these referred to as standard, default or out of contract tariffs.

If you haven't actively signed up to an energy contract, your supplier has to put you onto a variable tariff.

These are the tariffs that are protected by the energy price cap, meaning they cannot have a unit rate higher than the figure set by energy regulator Ofgem.

You won't be charged exit fees to leave a variable tariff, so they give flexibility without a contract and end date.

If you are on a variable tariff, your standing charge and unit rate can increase and decrease at any time, within the price-capped amount. You have to be given 30 days' notice of this happening, so it wouldn't happen without warning.

Traditionally, they've been the most expensive options available. But due to the ongoing energy crisis they are almost universally the cheapest options on the market.

Fixed-rate energy tariffs

Fixed-rate tariffs offer guaranteed standing charges and unit rates, usually until a defined end date. You can end these contracts whenever you wish to, but some have exit fees if you leave before your contract is up.

Fixed-rate tariffs give the predictability of knowing that you'll be paying the same amount for a set period of time.

The tariff end date for a fixed deal is the date that your contract will come to an end. Customers can switch provider in the last 49 days of their contract without paying any exit fees.

It's worth noting that your unit rate is fixed - not your total bill amount. So if you are on a fixed tariff, you can still decrease how much you owe by reducing how much you use.

Amidst the energy crisis, companies have been advertising incredibly high fixed tariffs. While you may be tempted to switch to one so that you know you'll be paying the same amount for the next year or two, we wouldn't recommend it unless you see a fixed tariff close to the current price cap rates.

Find out more about the different types of energy tariffs.

Unit rates and standing charges: what are you actually paying for?

Your bill is made up of a standing charge and a unit rate.

• Unit rates are the cost per unit of gas or electricity you actually use. These are determined based on your meter readings.
• Standing charges are the fees you pay to your energy provider to access energy, before you've even started paying for what you use. They can also be called a daily rate or a daily unit rate.

Unit rates

The electricity you use is measured in Kilowatt hours (kWh). One kWh is the amount of energy that would be used if you kept a 1,000-watt appliance running for one hour.

The gas you use is measured in cubic feet. In order to standardise your bill, this is then converted into kWh using a standard industry formula.

Energy use is categorised by providers as: estimated, actual or smart usage. The difference between these is in how you submit your meter readings. You may see them shortened to E, A and S on your bill.

The majority of your bill will be based on these usage measures.

• Actual means that you have actively inputted a meter reading giving a precise indication of what energy you've used.
• Smart means that a meter reading has been automatically sent to your provider by a smart meter.
• Estimated means that in the absence of information from your energy meter, your provider has made an assumption about how much energy you might have used. They can be calculated from average or expected energy use.

It's important to avoid paying for 'estimated' usage - especially if you have actively been trying to cut back on how much you use. Submitting regular meter readings makes sure you're charged accurately.

Your energy consumption and costs are calculated annually, or since you joined or were moved to your current supplier.

Read more: six ways to keep your heating costs down

Standing charges

This is a fixed amount that you pay for every day (or month) that you have your energy tariff, even if you don't use any fuel. Some suppliers have offered £0 standing charges in the past, but these are no longer available in the current market.

Energy companies justify standing charges by explaining that they cover their costs for maintaining their networks, as well as other elements that come as part of running their business, such as paying government levies and grants like the Warm Home Discount.

If you are on a price-capped variable tariff, the standing charge you pay counts as part of the price-capped amount.

Simply put, gas and electricity providers can't charge you more than the price cap for the combination of your standing charge and unit rate if you're on one of these tariffs. But how they split the balance is up to them.

Even with recent rises, for most people standing charges will still only make up a small proportion of your payments.

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  Find out more aboutwhy energy standing charges are going up

Your energy account balance and how you pay

You'll find your energy account balance near the top of your bills. It tells you how much you owe your provider or how much you will be in credit at the end of the statement period.

You will pay for your energy either by:

• Direct debit (either monthly or quarterly)
• Paying upon receipt
• Pre-payment (or pay as you go)

Direct debit payments

By far the most common way to pay for energy, direct debit suits energy companies as they know the same amount will be transferred from your bank account every month or quarter. Almost all companies offer a discount for paying by direct debit, so it's often the cheapest way to do it.

Energy companies will estimate how much they think you will use over the year in order to determine a reasonable monthly direct debit amount and then divide this by 12 and charge you the same amount each month. That means that some months you might pay for more than you've used, and other months you might pay for less.

If you have been predicted a large monthly direct debit that you think doesn't accurately reflect your predicted usage, it's worth querying this with your supplier as we do hear of errors in this process.

You're in credit with your supplier if you have paid for more energy than you have used. A credit balance will be listed as +, CR or a positive balance on your statements.

You shouldn't have to do anything if your bills are in credit, as it usually means everything is under control. However, if you notice your credit balance creeping up, it could mean that your direct debit payments are too high for your actual usage. Contact your provider in this case, as you could have an argument for reducing your monthly direct debit amount.

If you are in debit with your energy firm it means you've paid for less energy than you've used. Debit can be found on your bill as -, DR or negative balance.

Companies usually try to make sure that you pay more than you are expected to use in summer to account for higher usage in winter so that you don't fall into debit.

Paying upon receipt

You might see these described as quarterly cash or cheque or QCC. If you pay for your energy when you recieve your bill - either by online payment, card payment or by cheque - you will have the advantage of only ever paying for the energy that you have actually used.

This tends to be a more expensive way of doing it, as most companies offer discounts for setting up a direct debit instead.

Prepayment

Prepayment (pay-as-you-go) energy tariffs tend to be higher than those paid by direct debit. Prepayment meters are covered by the price cap, with average bills set to climb from £1,309 to £2,017 in April 2022.

Around four million homes in England, Scotland and Wales have them. In Northern Ireland, prepaid meters are one of the most common ways of paying for your electricity and gas.

Some companies specialise in this type of energy contract. Traditionally, you'd top up your prepayment key or card at local retailers, though some providers now let you do it via a smartphone app.

Find out more in our guide to prepayment energy meters.

Read our tips: 10 ways to save on energy bills

Energy meters

Information about your meter tends to be found near the bottom of your statements. Your electricity supply number (MPAN or Meter Point Administration Number) is a 21-digit number uniquely identifying your home's electricity meter, while your gas meter point reference number (MPRN or Meter Point Reference Number) has between six and 11 digits to uniquely identify the gas meter for your property.

If you don't have a smart meter, you'll need to make sure you frequently provide readings to your energy company so that you are only paying for what you've used.

If you do have a smart meter, this will send regular meter readings to your enregy company for you.

Find out more:smart meters explained

Inaccurate bills due to estimated readings can be a real problem for consumers. You may find you overpay and end up having to get money back from your provider.

Even worse, you might happily underpay and then be faced with a large bill to make up the difference, as happened to an energy customer who recently got in touch with us:

Read more:'My energy direct debit is being increased by more than £300 per month, is it right?'

The key thing to remember is that if you feel there's something wrong with your energy bill, always get in touch with your provider sooner rather than later.

To find out more about how Which? can help you tackle the high cost of living right now, head to our advice on how to ease the squeeze.