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If you’re reading this article, you must be wondering what goes into the electricity tariff and what contributes to the increase or decrease of your monthly electricity bill.
You’re probably also wondering, why is the electricity tariff higher than what is offered on the open electricity market? And what determines the cost of each component?
Quick summary: The 4 cost components of the electricity tariff are:
- Energy Costs
- Network Costs
- Market Support Services Fee
- Market Administration and Power System Operation Fee
What’s the electricity tariff & what are its components?
The electricity tariff is regulated by the Electricity Market Authority (EMA). Before the launch of the Open Electricity Market, every household bought electricity via SP Group, and paid the prevailing electricity tariff rate.
This electricity tariff, which reflects the long-term costs of producing electricity, is revised every quarter.
The electricity tariff is made up of 4 components:
1. Energy Costs
- Comprises over 70% of the electricity tariff
- Paid to power generation companies
- Adjusted quarterly
To reflect changes in (a) the cost of fuel — cost of imported natural gas, aka the raw material used to generate electricity; this is tied to oil prices; and (b) power generation — operating and maintaining the power stations.
2. Network Costs
- Comprises about a quarter of the tariff, works out to 25.6% for Apr-Jun 2021
- Paid to SP Group
- For the cost of transporting electricity through the power grid
3. Market Support Services Fee
- Comprises 1.8% of the tariff (Apr-Jun 2021)
- Paid to SP Group
- For billing and metering, data management, retail market systems as well as market development initiatives
4. Market Administration and Power System Operation (PSO) Fee
- Comprises less than 1% of the electricity tariff
- Paid to the Energy Market Company and Power System Operator
- Reviewed annually
- For operating the electricity wholesale market and power system
Just so you know, the bulk of the electricity tariff (more than 70%) goes towards energy costs. It’s paid to power generation companies, because they operate the power plants which produce the electricity that we use.
It’s usually the energy costs that keep fluctuating due to changes in the price of the raw materials needed for power generation. This is the reason why the tariff sometimes goes up or down every quarter.
If you’ve been following news about oil prices, you’ll probably see the link between those prices and the movements of the electricity tariff.
The other cost components of the tariff remain relatively stable.
What does SP Group do with its portion of the electricity tariff?
SP Group receives the Network Costs and the Market Support Services Fee components of the electricity tariff. Based on Apr-Jun 2021’s figures, this adds up to 1.8% + 25.6% = 27.4% of the total electricity tariff.
SP Group uses this money to operate and maintain the power grid (sorta like the “roads” or “network” to transport electricity from the power plants to our homes and businesses). As the power grid is the backbone that transports electricity to everyone — yes, even if you’ve already switched to an electricity retailer — it MUST remain reliable and working (imagine life without electricity…scary!)
They also need to send crew to visit your unit to check your meter, and to do other things like billing, data management, retail market systems and market development initiatives.
How are electricity retailers able to offer lower prices?
According to the Energy Market Authority, you could be paying up to 30% less on your electricity bills when you switch to a retailer. Electricity retailers are able to charge lower prices because they typically offer rates that reflect the current market conditions, level of competition and short-term costs of producing electricity.
Remember, the regulated electricity tariff reflects long-term costs that include building the infrastructure for electricity to reach our homes smoothly.
In fact, SP Group supports the liberalisation of the electricity market. It facilitates the switch to a retailer if a customer chooses to do so, and acts as the retailer of last resort for customers to fall back on — this means that the customer can always switch back to SP Group should something happen to their retailer. SP Group continues to operate the national power grid, regardless of whether you remain with SP Group or decide to make the switch.
Consumers can also buy electricity from the wholesale electricity market at half-hourly wholesale electricity prices through SP Group.
How you can lower your electricity costs
Here are 2 simple tips:
- Choose energy-efficient appliances. Look for the energy label: The greater the number of ticks, the better the energy efficiency.
- Use the SP Utilities app to track your usage; this can help you save, and adopt a greener, more sustainable lifestyle.
Find out more about the SP Utilities app and download it here.