Energy bills explained: understanding your gas and electricity costs

Energy bills look complicated. They’re not. The maths is simple once you strip away the jargon.

2-minute bill check

Before changing supplier, check three things on your latest statement:

• Your electricity and gas unit rates (p/kWh)
• Your standing charges (p/day)
• Your payment type (direct debit, prepay, or quarterly)

That tells you if your cost problem is usage, tariff, or payment method.

The bill formula

Two things make up nearly all your energy cost.

Unit rate: what you pay per kWh. Around 20-30p for electricity, 5-7p for gas, depending on location and price cap. Use more, pay more. This is where most of your money goes.

Standing charge: fixed daily fee regardless of usage. Covers grid maintenance, meter upkeep, and policy costs. Electricity runs 40-60p/day, gas 20-30p/day. You pay this on holiday, when you’re away, when the house is empty: doesn’t matter. It’s literally a daily charge.

Your total bill formula is: (unit rate × kWh used) + (standing charge × number of days) + 5% VAT

Let’s work through an actual example. Say your bill covers 87 days with these rates:

• Electricity: 24.5p/kWh unit rate, 50p/day standing charge
• Usage: 630 kWh
• Gas: 6.2p/kWh unit rate, 28p/day standing charge
• Usage: 1,840 kWh

Electricity calculation:

• Usage cost: 630 × 24.5p = £154.35
• Standing charge: 87 × 50p = £43.50
• Subtotal: £197.85
• Add 5% VAT: £197.85 × 1.05 = £207.74

Gas calculation:

• Usage cost: 1,840 × 6.2p = £114.08
• Standing charge: 87 × 28p = £24.36
• Subtotal: £138.44
• Add 5% VAT: £138.44 × 1.05 = £145.36

Total bill: £353.10

This is exactly how suppliers calculate it. No hidden maths. If your bill doesn’t roughly match this pattern, something’s either estimated wrong or you’ve been charged the wrong rates. That’s worth investigating.

Payment setup: where costs drift

Your payment method affects both your costs and your cash flow. There are three main options.

Direct debit is cheapest and most common. Here’s how it works: the supplier estimates your annual usage (based on historic consumption or, if you’re new, on your property type and size). They divide that by 12 and charge you the same amount each month. During summer you use less, so you build up credit. In winter you use more, drawing that credit down. Come February or March, they do a “true-up”: checking actual meter readings against the estimate.

If you’ve overpaid, they either refund you (usually back to your bank within 7 days) or credit your account toward next winter. If you’ve underpaid, you get a larger bill that month, though you can negotiate a payment plan. The key: you get a discount (usually 1-3%) just for paying by direct debit, because it’s predictable income for the supplier. This alone makes it worth choosing.

What to do if you’re in credit: Many people panic when they see a large credit balance. Don’t. This is normal and actually sensible: it means you’ve paid ahead for your winter peak. You can request a refund, but then you’ll face bigger bills in November and December. Better to let it sit and use it. If you switch supplier before using the credit, request a refund before the switch completes (get your final balance in writing).

Prepayment meters mean you pay before you use. You top up at a shop, post office, or via an app, then the meter shows your remaining balance. Rates used to be 10-15p per kWh higher than direct debit: a real penalty. The gap has largely closed over recent years, and some suppliers now offer the same rates. Still, always compare your exact rates before switching to prepay. It does give you control: if money’s tight, you simply can’t use more than you’ve paid for. That’s useful for budgeting.

Quarterly billing is the old standard but costs you. Most suppliers charge 15-20p extra per kWh just for quarterly billing, which adds up to £100-£200 per year. The reason: they’re estimating longer into the future (3 months instead of 1), so they add a safety margin. Plus you’re paying three lump sums rather than twelve small ones, which is cash-flow negative. Unless your supplier won’t let you switch away, move to direct debit.

Estimated vs actual readings: why estimates go wrong

Your bill can be based on two types of meter reading: actual or estimated. You should see an “E” marked next to estimated readings on your statement.

Actual readings are meter numbers you or the supplier reads directly from your physical meter. They’re accurate. Estimated readings are the supplier’s guess based on your historic usage, adjusted for the time of year. They’re usually close, but they can be wildly wrong.

Why do estimates drift? If you’ve changed behaviour (got a new boiler, started working from home, added an extra person to the household, had a vacation), the estimate won’t know that yet. If your meter is in an awkward location and the reader can’t access it, they estimate instead. If you’ve just moved in, they might estimate based on the previous tenant’s usage, which could be completely different.

The problem: if the estimate is high, you pay too much. If it’s low, you face a shock bill later. That’s why it’s worth submitting readings yourself.

How to submit a reading: Most suppliers have online portals where you can input readings in seconds. Some have apps. You can also text, email, or ring: though this is slower. Submit quarterly (or monthly on direct debit) if possible. It takes 30 seconds and keeps your bill accurate.

What if you find a big overpayment: If you discover you’ve been overcharged for a few months, suppliers must correct it. If it’s been more than a year of overcharging, it gets trickier: see the backbilling section below.

Economy 7 and Economy 10

These are special tariffs where you get cheaper electricity at night in exchange for pricier daytime rates. Economy 7 gives 7 hours of cheap overnight rates (usually 11pm–6am or 12am–7am depending on your region). Economy 10 gives 10 hours, split across morning and evening.

The maths works only if you shift significant usage to cheap hours. If you run a storage heater overnight, you’re ideal for E7/E10, you save considerably. If you charge an EV overnight or run the washing machine after 11pm, it’s worth considering. But if most of your usage is during the day (kettle, cooking, heating), the high daytime rates will cost you more overall.

How to check if you’re on Economy 7 or 10: Look at your bill: the unit rate section will say “Economy 7” or “Economy 10” clearly. You’ll see two rates: a cheap one and a standard/expensive one. Your meter will also have a special dial or display showing which rate period you’re in.

Should you switch off it? If you’re on E7/E10 but can’t shift usage to cheap hours, you’re losing money. Switching to a standard tariff could save £50-£150 per year. Ask your supplier: it’s a free change and takes a week or two. But if you can genuinely run appliances overnight, stay on it. The maths is compelling.

One caution: some suppliers charge extra to stay on E7/E10 (they’re less common now). Compare the full tariff, not just the unit rates. Sometimes you’re better on a cheap standard tariff than on Economy 7 at a premium supplier.

Dual fuel or separate?

Here’s the choice: same supplier for both electricity and gas (dual fuel), or split suppliers.

Dual fuel advantages: Single bill, single customer service team, often a small discount (2-5%), and simpler admin. Most households go this route because it’s easier and the discount usually outweighs anything else.

Separate suppliers advantages: You can cherry-pick the cheapest available for each fuel. In theory, you might find the best electricity supplier isn’t the best gas supplier. But here’s the catch: the discount for dual fuel often beats the savings from cherry-picking, and you now manage two accounts, two direct debits, two customer service numbers. It’s genuinely more hassle. Even if separate saves £20-£30 per year, most people don’t think it’s worth the extra work.

When separate makes sense: If you’re moving into a property where one fuel is on a particularly bad supplier or expensive fixed contract, it might be worth splitting to drop that one supplier immediately without losing a dual-fuel discount. Or if one of your fuels is on a specialist tariff that genuinely beats everything else and the other supplier has raised prices heavily. But these are rare.

The honest take: dual fuel works for most people. You could spend an hour finding a separate-supplier combo that saves £35 per year. Or you could leave it alone and spend that hour on something worth more money to you. Your choice.

Backbilling rules: your protection against surprise bills

Here’s something important: suppliers can’t dig back into the past indefinitely and charge you for past underbilling. Ofgem sets a hard limit.

If your supplier discovers they’ve been charging you too little (because estimates were wrong, or a meter fault wasn’t caught), they can backbill you for a maximum of 12 months. Anything older than that is written off. This protects consumers from facing shock bills years later.

The same rule applies in reverse: if you’ve been overcharged, they owe you 12 months of refunds. After that, it’s gone.

When backbilling happens: Usually when a meter is read for the first time in years and shows you’ve been estimated far too high. Or when a meter fault is discovered. Or when you finally move out and they get an actual reading.

What to do if you’re backbilled: First, check it’s legitimate. Ask the supplier to show their working and confirm the meter reading is correct. Get a second opinion from the Energy Ombudsman if you think it’s wrong. If it’s correct and within 12 months, you legally owe it: but you can ask for a payment plan if it’s large. If they’re trying to backbill beyond 12 months, you’re protected. Tell them no and report them to the Ombudsman if they push back.

Protect yourself: This is another reason to submit actual meter readings regularly. It keeps estimates close to reality and prevents large backbills later.

What to verify on every statement

Your bill shows your account number, the billing period, previous and current meter readings (or estimates), units used, the unit rate, standing charge, total cost, and payment method. The key thing to check is whether the readings are actual or estimated - look for an “E” next to estimated readings. If your bill is based on estimates, submit an actual reading to make sure you’re not over or underpaying.

We’ve got a more detailed walkthrough in our guide to reading your energy bill.

If your bill seems wrong

Contact your supplier first and explain the issue. Give them 8 weeks to sort it. If they don’t, or if you’re not happy with the response, the Energy Ombudsman can investigate. Common problems include estimated readings being too high, incorrect unit rates, and bills arriving for properties you’ve already moved out of.

Switching suppliers

You can switch at any time. It takes about 21 days, your supply isn’t interrupted, and the new supplier handles all the admin. The biggest savings come when a fixed deal has expired and you’ve been moved onto a pricier default tariff. Even if the savings are modest, it’s worth checking once a year. We’ve covered the full process in our switching guide.

Bringing costs down

The most reliable way to cut energy costs is to use less. Turn the thermostat down a degree (saves around £100 a year), fix draughts, use a timer on your heating, and switch to LED bulbs. Beyond that, make sure you’re on the cheapest tariff available, pay by direct debit, and check whether you qualify for any government support schemes. There’s more detail in our energy saving tips guide.