Last year wholesale electric and gas prices increased in volatility leading to a higher than usual unit rate and in turn higher monthly bills for those who have recently renewed their supply contracts. However, this is just the tip of the iceberg. The true, 'unseen' causes for rising bills are what are known as third party costs (TPC) or non-commodity costs and these charges make up most of an energy bill. 

What are Third Party Costs?

So what do we mean by third party costs? Utility bills are a blend of the commodity cost (the fuel you consume) and non-commodity costs which include government originated charges and third party charges.

Some of these charges are levied on suppliers who pass them onto the customer. Most energy contracts have these charges included in the overall agreed energy price, meaning they won’t show up on a bill. In some cases they will be named separately but it is down to the supplier whether they do this. 

Unless a consumer has an understanding of the energy market, it is very difficult to truly understand what is being paid for. Below is how utility bills are made up:

_{*All data presented is an average and comprised of supplier market data around the UK. This data does not include VAT or CC. Percentage split and charges may vary depending on, but not limited to, size of supply, market movement, DNO area, supplier-specific charges and Premium Green rates}

Examples of government-originated charges are:

• Feed-in Tariff (FiT) Charge

• Renewables Obligation (RO)

Electricity Market Reform (EMR) charges include:

• Contracts for Difference (CfD)

• Capacity Market (CM)

Examples of third party charges include:

• Distribution Use of System (DUoS)

• Balancing Services Use of Sytem (BSUoS)

• Transmission Network Use of System (TNUoS)

However, new rulings in November last year led to the suspension of the UK’s Capacity Market (CM) by the European Court of Justice (ECJ). The Capacity Market was introduced by government as a countermeasure to insure against future blackouts, acting as a balancing tool at times of high demand or low output via renewable sources.

The suspension of this mechanism could spell trouble for the UK market as it could make power generation an ever more sought-after resource at times of high usage, inevitably pushing the wholesale price up further.  

What is happening?

Since 2008, non-commodity costs have become a higher proportion of the overall energy cost paid by the consumer. Before this, the cost of energy consumed was around 83 per cent of the average bill, whereas today it is less than half and forecasts predict an even smaller percentage by 2020.

So, even though wholesale energy prices are rising they account for less than half of the total bill cost, with the higher proportion made up of third party costs as suppliers pass on these costs to the consumer and add in their margin. 

The Past, Present and Future of Electricity Costs: Unit Rate Split – What are you actually paying for?*

_{*All data presented is an average and comprised of supplier market data around the UK. This data does not include VAT or CCL. Percentage split and charges may vary depending on, but not limited to, size of supply, market movement, DNO area, supplier specific charges and Premium Green rates.}

What the future holds for consumers' energy prices

Ofgem has raised an action against energy suppliers due to a shortfall of £103 million due to suppliers not submitting their Renewable Energy Obligation Certificates for 2017-18. A renewables obligation certificate (ROC) is a green certificate issued to an accredited generator for eligible electricity generated. This has resulted in 34 suppliers failing to meet their contracted obligations and having to pay late buy out payments.

Economy Energy, which went out of business earlier this week, was the ninth energy supplier to do so in the last 12 months, which doesn’t fill consumers with confidence. The closures have left hundreds of thousands of displaced customers that Ofgem has already begun assigning to new providers.

Energy wholesale prices are currently very volatile and the slightest change in supply or a major event could push prices either way. Against this backdrop it is worth domestic and commercial consumers investing some time into energy management or brushing up on the latest energy market news.

Further information

Contact Savills Energy