Why Energy Tariffs Differ By Region

15 Oct 2018

Man looking his phone and using a calculator

Many people aren’t aware that energy tariffs – in other words, how much you are paying for your gas and electricity – vary by region. A lot of customers view this as unfair and don’t understand why this should be the case. So, why do you pay more in some areas compared to others? Well, to start, it’s important to know how energy is supplied throughout the country.

How do we get our energy?

The supply of gas and electricity is, as you might imagine, incredibly complicated. What you need to know to have a basic grasp of how this impacts price though is that, in the case of electricity, it is supplied through Distribution Network Operators, also known as DNOs, alongside energy suppliers who use distribution networks across 14 different geographical regions. As there are these 14 different regions, the network serving them is, therefore, able to set different prices to an extent as they see fit.

However, they don’t have complete control over these prices: there are rules in place by the regulatory governing body Ofgem. This prevents these Distribution Network Operators from creating a monopoly.

In the case of gas, there are eight Gas Distribution Networks that work over different regions. Just as is the case with electricity, this allows the GDNs, as they are otherwise known, to set their own prices for the regions they cover. Similar to the electricity suppliers, there are also regulations in place to ensure that gas suppliers don’t overcharge customers, at least above a certain extent.

Nonetheless, these regulations do not do anything to prevent networks from setting up their own prices, thus creating a difference in energy tariffs across different areas. This creates somewhat of a lottery when it comes to energy prices.

It is understandable that people feel irritated by the thought of having to pay more than others for the same service simply because of where they live and without a fair cost-based reason for it. For example, if it were harder to supply energy to a specific area for some reason, then there would at least be a reasonable basis for the difference in price. As it stands, your location being an energy tariff lottery does seem rather unfair, even if there are measures in place to reign it in.

So, what exactly influences how much energy suppliers choose to charge certain areas?

Energy distribution

There are a few reasons why a region’s energy prices may be different. It’s worth pointing out that this isn’t all the doing of the energy suppliers: they are massively anchored by how much the energy distributors choose to charge local energy suppliers. These distributors are in turn anchored by local geographical factors. We’ll go more into that in a little while. This, therefore, sets the benchmark for how much energy suppliers can charge while still making a profit.

While the intricacies of energy economics can be very complicated, a lot of it comes down to a simple case of supply and demand. And it’s worth noting that, while energy suppliers don’t totally get off the hook here, these factors, alongside the distribution factor, are not necessarily in their control.

The supply and demand factor: Usage

So, how does supply and demand affect energy? Well, just like all other products, energy is cheaper when bought in bulk. Therefore, if energy suppliers have more customers to sell to – or more specifically, more energy is being used in one area, as population isn’t the only factor when it comes to an area’s energy usage – then they can buy in bulk and save money.

Think of it just as when you go to the supermarket: if you buy a lot of one product, the cost of each individual item goes down. By the same principle, an area which needs a lot of energy can often get that energy cheaper than places which do not.

However, this is not always the case. There are plenty of examples of areas lower in population density which have cheaper energy bills. That’s because it’s not the only factor in this equation.

The supply and demand factor: Availability

Another issue, which really muddies the waters in having a clear understanding of which areas will have higher energy bills, is that the costs are not always the same. Certain areas have a bigger energy supply. This could be due to fracking, a naturally large supply of oil or investment in renewable energy.

In many cases, the availability, or supply factor simply outweighs the impact of buying in bulk and thus, you end up with situations where a much less metropolitan area is paying less for their energy.

Why can’t the regulator simply make all the prices fair?

It’s worth pointing out that, although Ofgem do exist to keep prices in check, they do not have any ability to regulate prices. Instead, they regulate the market. This means that their job is to ensure and encourage healthy business competition and therefore customer choice. This is to strike a balance of preventing customers being ripped off while maintaining a reasonably free and open market.

The merits of this system are a matter of debate. However, the answer to why the regulator doesn’t make all the prices even is simply that they do not have those powers.

So, what can customers do to lower energy prices?

You may think that this all seems pretty beyond your control. That’s not necessarily the case though, because the customers are the demand. Now, we know we can’t very well expect people to live without energy until prices are lowered. However, the competition that Ofgem encourages is how you as a consumer are powerful. That’s because you can always choose another supplier: if you feel one is offering a bad deal, you can simply vote with your feet and go elsewhere.

The impact here is limited due to the already set costs by the local distribution networks, but customers can ensure that they choose the cheapest rates. By doing so, they encourage energy suppliers to lower costs as best they can to avoid their customer base moving to a competitor if there is a better offer on the table.

One issue though is that people often don’t know what deals are available to them. That’s where Hoppy comes in. We make it so quick and simple to compare energy suppliers in your local area, so you can find the best deal and save money in just a couple of clicks.

 

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