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How the UK energy market works, a clear guide for households and small businesses
The energy supply chain in Great Britain can look complicated, but it breaks down into four clear parts: the firms that generate electricity and gas, the networks that move it, the suppliers who sell it to you, and the regulators who set the rules and enforce them. This article explains each piece, why prices move, and what you can do if you want a better deal.
The four parts of the market
Generation, transmission, distribution and retail. That order follows how energy travels from source to socket.
Generation covers power stations and renewable farms that produce electricity, and the companies that bring gas into the UK. Today the mix includes gas and nuclear, with steadily growing amounts from wind and solar. Gas still heats many homes and fuels several power stations.
Transmission is the high-voltage network that carries electricity across the country. National Grid Electricity System Operator, often called the ESO, runs day-to-day balancing of generation and demand on that network [1].
Distribution is the lower-voltage network that brings power from transmission substations to homes and businesses. Regional firms manage the local wires and pipes, and their charges appear on your bill as network fees.
Retail is the suppliers, the companies you sign a contract with. Suppliers buy energy on the wholesale market, pay network and policy costs, then pass those costs on to customers through tariffs.
Who does what: the regulators and market bodies
Ofgem is the regulator for gas and electricity in Great Britain. It issues licences to suppliers, enforces consumer protections and sets the energy price cap for default tariffs [2]. The ESO balances the grid in real time. Elexon administers the trading arrangements and settlement processes that make sure money flows to generators and suppliers correctly [3].
How energy is bought and sold
Wholesale energy is traded on exchanges and through bilateral contracts. Suppliers buy energy in advance to cover what they expect customers to use. On the day itself, the ESO makes short-term adjustments. If demand is higher than planned or a generator drops out, the ESO calls balancing services and pays providers to increase or reduce output.
Power can also be imported via interconnectors to continental Europe and Ireland. Those imports help keep the system supplied and influence prices.
For electricity, settlement and reconciliation of volumes use systems run by Elexon. Gas uses different arrangements, but the principle is the same, measured volumes are matched to payments [3].
What makes up your bill
Your bill is more than the wholesale price of gas or electricity. Typical components are:
- wholesale cost, what your supplier pays for the energy itself
- network charges, fees for moving energy along transmission and distribution lines
- environmental and social obligation costs, such as schemes that support renewables
- VAT, currently 5% for most domestic energy but 20% for many non-domestic uses
- supplier operating costs and margin, covering billing, customer service and any profit
Ofgem publishes guidance on how these elements affect household bills and maintains the price cap framework to limit what suppliers can charge on default tariffs [2]. Businesses should note the price cap does not apply to non-domestic contracts, and many business supplies are charged VAT at 20% rather than the reduced domestic rate.
The price cap, tariffs and contracts
The price cap controls the unit rates and standing charge for default or standard variable tariffs. It does not freeze prices, it is adjusted periodically to reflect changes in wholesale and other costs. If you are on a fixed tariff, the price cap will not change the price you agreed, although suppliers can still apply exit fees if your contract allows.
Tariff basics you should know. The standing charge is a daily fixed cost to cover meter provision and network access. Unit rates are what you pay for each kilowatt hour. Dual fuel means gas and electricity from one supplier, which can simplify billing and switching.
For businesses the rules differ. There is no general price cap for non-domestic customers. Small businesses should still compare deals and consider contract length and exit fees.
How switching works in practice
Switching supplier is usually straightforward. You pick a tariff, the new supplier arranges the switch and the transfer normally completes within 21 days for electricity and 28 days for gas. If you have a smart meter, the new supplier can often complete the change faster and with more accurate readings.
Before switching, take a meter reading and check whether you are on a fixed-term deal that carries an exit fee. Suppliers must provide a final bill and return any credit you have. Ofgem requires suppliers to follow clear switching timelines and to protect consumers throughout the process [2].
If you have a business meter or unusual arrangements, switching can take longer and may require specific paperwork. Small businesses should ask the prospective supplier about timelines and whether the supply is classed as domestic or non-domestic for VAT purposes.
Practical checklist: what to do next
- Check your current tariff, standing charge and unit rate on your latest bill. Note whether you are on a fixed or variable deal.
- Take a recent meter reading and keep a photo of it.
- Compare tariffs, focusing on total cost over 12 months, not just headline rates. Visit our Energy Switch Offers page for current deals: https://www.energyswitch.co.uk/energy-switch-offers-uk/
- If you use a lot of energy at particular times, ask about time-of-use or Economy 7-style tariffs and whether a smart meter is supported.
- If you run a small business, check VAT treatment and whether the contract is classed as non-domestic.
For tips on reducing usage as well as switching, see our piece on practical energy savings, which covers measures from LED lighting to simple behavioural changes: https://www.energyswitch.co.uk/energy-saving-for-self-storage-by-switching-suppliers/
Q: What is the Ofgem price cap and how does it affect me? A: The price cap limits what suppliers can charge for units and standing charges on default or standard variable tariffs. It does not apply to fixed-term contracts you signed. Ofgem updates the cap periodically to reflect costs [2].
Q: Can a small business use the price cap?
A: No. The price cap is for domestic customers. Most business contracts are outside the cap and may be subject to 20% VAT.
Q: How long does switching take?
A: Typical domestic switches finish within 21 days for electricity and 28 days for gas. Smart meters can speed this up. Suppliers must provide a final bill and return any credit balances [2].
Q: What is a standing charge?
A: It is the daily fixed portion of your bill that covers meter provision, metering services and a share of network costs. It appears separately from your unit rates.
Q: Why did my bill suddenly increase?
A: Changes in wholesale costs, adjustments to the price cap, higher usage, or moving from a fixed to a variable tariff can all raise bills. Check your usage, ask your supplier for a breakdown, and compare tariffs.
Sources
- https://www.nationalgrideso.com, National Grid Electricity System Operator overview and balancing services. [1]
- https://www.ofgem.gov.uk/consumers/household-gas-and-electricity-guide/how-much-your-energy-bill/energy-price-cap, Ofgem, energy price cap and consumer guidance. [2]
- https://bscdocs.elexon.co.uk/guidance-notes/the-electricity-trading-arrangements-a-beginners-guide, Elexon, electricity trading and settlement. [3]
- https://www.energy-uk.org.uk/insights/different-parts-of-the-energy-market/, Energy UK explainer on market parts. [4]
- https://commonslibrary.parliament.uk/research-briefings/cbp-9768/, House of Commons Library briefing, introduction to the domestic energy market. [5]
