How electricity is priced

To understand why your electricity tariff costs what it costs, why it moves and why someone in Wales might pay more than someone in London, you need to understand the underlying cost stack that your supplier is exposed to. Typically suppliers build a model for this cost stack, add up the various components, add a margin and set that as your tariff. Here we explore each element in turn to give you an understanding of your electricity tariff.

The cost stack

A domestic unit rate in Great Britain is built from four broad layers:

Indicative for a typical 2024/25 domestic tariff. During the 2022–23 energy crisis, wholesale's share exceeded 60%.

Components in detail

Wholesale — the half-hourly market price for electricity, paid at transmission level. BSUoS (Balancing Services Use of System) is added on top: a charge National Grid ESO levies each half-hour to cover the cost of keeping the grid in balance. Both are billed on gross transmission volume.

Network covers three separate charges:

DUoS is where regional variation is most pronounced — rates differ by up to 4× across DNO areas and vary by time of day. → Explore DUoS charges by region

Policy levies are flat per-kWh charges set annually to fund government energy policy:

• RO — Renewables Obligation (support for renewable generation)
• FIT — Feed-in Tariff (legacy small-scale generation payments)
• CfD — Contracts for Difference (newer renewable support mechanism)
• CM — Capacity Market levy (payment to keep backup capacity available)
• ECO / WHD — Energy Company Obligation and Warm Home Discount (social obligations)

Supplier costs cover metering, customer services, hedging, and a retail margin, with 5% VAT applied to the total.

Losses and the volume hierarchy

Electricity is lost as heat in wires — roughly 7–10% of what generators inject never reaches a customer meter. Suppliers account for this by purchasing more wholesale energy than their customers consume. Each cost component is charged on a different gross-up basis:

d  =  metered demand          (what the customer actually uses, kWh)
g  =  d × LLF                 (grossed up to Grid Supply Point for distribution losses)
f  =  g × TLM                 (grossed up to transmission level for transmission losses)

• LLF (Line Loss Factor) — set per DNO per time period, typically 1.07–1.10 for domestic LV
• TLM (Transmission Loss Multiplier) — set per zone per BSC season, typically 1.00–1.02

Charges billed at each level:

The formula

For each half-hour settlement period, the cost to serve one unit of metered demand is:

cost = f × spot    +  f × BSUoS
     + g × TNUoS   +  g × AAHEDC
     + d × DUoS    +  d × RO  +  d × FIT  +  d × ECO  +  d × WHD
     + supplier opex + margin
     × 1.05  (VAT)

The nested structure (d → g → f) means transmission-level charges are amplified by both LLF and TLM. A supplier with a high-loss-factor customer effectively pays more for wholesale and BSUoS even at identical spot prices.