To better understand your electricity costs you should know what different cost elements your supplier is billing you for.
First of all, your bill depends on the price at which your supplier manages to procure electricity from the wholesale market. Unfortunately, your supplier won’t just pass this price on to you. In fact, Wholesale Costs make up only around 40% of your electricity bill.
The remaining ~60% are owing to different Non-commodity Costs. Part of these Non-commodity Costs go towards your supplier to cover their costs for billing, metering, sales, customer services, etc., as well as their profit margin. Another part is levied onto the supplier by different third parties and in turn passed onto you by your supplier.
Third Party Costs
These costs that your supplier filters down onto your bill are called Third Party Costs and fall into one of two main categories: Either they are attributed to the delivery of electricity to your premises (so-called Network Charges), or they are Government originated (so-called Environmental and Policy Charges).
Network Charges are supposed to cover the costs of transporting and distributing electricity from the power station (also: Generator) across the country into your business premise. They can vary due to the general consumption level, and how charges are distributed amongst users of the network, mainly depending on the geographical location of your company, as different areas place different levels of demand on the network.
Network Charges can be divided into Distribution and Transmission Charges. You pay them via the supplier, the former to the Distribution Network Operator (DNO), and the latter to the Transmission System Operator, National Grid.
Distribution Charges include:
- Distribution Use of System (DUoS), for transporting electricity over the local Distribution Network to your meter. DUoS Charges can occur in the form of capacity charges, standing charges, or as a variable element depending on your consumption, or they can be incorporated in your unit rates.
- Distribution Losses, for electricity lost in transformers and conductors during the transportation of electricity through the Distribution Networks.
Transmission Charges include:
- Transmission Use of System (TNUoS), for transporting electricity from Generators via the Transmission System to the local Distribution Networks. Only businesses with Half-Hourly meters are charged for TNUoS, based on the average of your three highest usages during the so-called TRIAD period, the three months of a given year when National Grid expects overall demand for electricity to be the highest.
- Balancing Service Use of System (BSUoS), for all actions taken by National Grid to balance supply and demand across the system. They are applied as a flat tariff across all users and depend on the kind and amount of balancing actions taken each day.
- Transmission Losses, for electricity lost in transformers and conductors during the transportation of electricity through the Transmission System.
Environmental and Policy Charges
Environmental and Policy Charges are also referred to as Cost of Government Obligations since they are usually linked to specific Government subsidy programmes. The costs related with these schemes are apportioned to and will increase your energy bill. However, some businesses benefit financially from these Government programmes.
The following charges fall into this category:
- Capacity Mechanism (CM), for ensuring that electricity can be supplied reliably and at affordable prices when it is needed the most. The charges for a given period will be determined at least a year in advance, and charged at the forecasted rate over the winter peak period, with a reconciliation taking place after the winter peak period has ended.
- Feed-in-Tariff (FiT), for supporting business that decide to generate their own electricity using small-scale renewables and low-carbon technology. To such businesses, suppliers will make
FiT payments for the electricity they generate, whether you use it or you export it to the grid. The charges for everyone else are estimated in advance of the charging period and reconciled after the charging period has ended.
- Renewables Obligation (RO), for the Government’s support of large-scale renewable electricity projects. RO was officially closed on 31 March 2017. To continue the support for large-scale generators of renewables and low-carbon electricity, however, the government has introduced the Contracts for Difference (CFD) scheme.
The pie chart below shows what proportion of your energy bill is caused by what kind of charges (UK 2017 average).
If you would like to discuss any of the above charges with us, or have general questions regarding your energy bills or contract, please don’t hesitate to get in touch!
Or download our PDF Quick Guide!