Market Insight Report Future third party costs
October 2024
Only half of a customer’s typical energy bill is made up of raw energy and supplier costs. The rest of the bill is made of up of industry charges that fund the maintenance, security and development of the UK’s energy infrastructure. These are essential to delivering energy to businesses.
These industry charges are third party costs (TPCs) that can, broadly, be split into network charges and environmental costs. These are also known as non-commodity or non-energy charges.
Network charges
Network charges are levied by the network operators to fund the operation, maintenance and development of the UK’s gas and electricity infrastructure.
Environmental costs
Environmental costs, also referred to as Policy costs, are paid to the government to help support the transition towards low carbon energy generation.
Typical bill breakdown
Outlook of network charges and environmental costs
TPCs are generally increasing year on year. What drives movements to these charges can vary depending on the charge and the mechanisms used to calculate them.
Common factors influencing third party costs include:
- Inflation
- Regulatory frameworks
- Commodity prices
- National demand
Third party costs over the next four years
Electricity third party costs
Third party costs that go into unit rates are generally increasing in the coming years. But network charges that make up the majority of standing charges are seeing a considerable drop in 2025.
So, customers should see a reduced standing charge when renewing electricity contracts from 2025.
Gas third party costs
Most of third party gas costs live in a customer’s standing charge. The level of standing charge is primarily linked to the level of consumption, so the more a site consumes, the higher their standing charge will be.
Gas unit rates only contain a small proportion of third party costs, with the raw gas cost making up the majority of unit rates.
Although gas third party cost changes are less volatile compared to electricity, if the nature of a site’s consumption changes significantly then so will their standing charges and unit rates.
Summary
Although third party costs are generally increasing across both fuels, ultimately there is always an element of uncertainty around how third party charges will outturn in the future.
From a customer’s perspective, depending on whether you are looking for budget certainty or price optimisation, there are products available from suppliers that can help you achieve these goals.
Read more on How billing works
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