Market Insight Report Third party costs outlook

What are third party costs on a business energy bill?

A customer’s energy bill includes more than just the cost of the raw energy and supplier costs - these typically make up only half of a typical energy bill.

The remainder of the bill is made up of a wide range of cost components that directly pay towards the maintenance, security and development of the energy infrastructure that is essential to delivering energy to customers’ homes and businesses.

These costs are known as third party costs (TPC) or non-commodity, or non-energy charges.

These charges can broadly be split into two categories.

1. Network charges

• These are fees from network operators for the maintenance, development and balancing of the electricity and gas networks.
• The charges can be split out by Distribution, Transmission and Balancing (electricity only) charges and are recovered via consumption-based, fixed and capacity charges.

2. Policy costs

• These are charges introduced by the government to help support and subsidise the transition towards low carbon generation and the challenges this creates.
• These include charges that encourage the development of low carbon generation (Renewable Obligation, Contract-for-Difference FiTs (both large scale generation) and Feed-in-Tariffs (small scale), as well as the Capacity Market scheme, that was set up to ensure adequate flexible generation capacity is available at times of peak demand or low supply.

Each charge varies greatly in terms of what drives the level of cost, when the charges are published and how they are recovered. The networks are closely regulated by Ofgem and as such there is much more transparency around how they are calculated and more notice and certainty around publication of final rates.
Whereas with policy costs, depending on the mechanisms involved, the final rate may not be fully known till after the charging year is over.

Subsequently for fixed price contracts, depending on the start date and duration of a contract, a large proportion of a customers non-commodity charges can be based on rates forecasted by the supplier.

Typical bill breakdown

Representative business cost stacks - gas (left) and electricity (right)

Future movements of third party costs

Due to the complex and varied way in which third party charges are recovered and forecasted by the respective industry bodies, the level of charge can move significantly from year to year, with charges generally increasing but not always.

Electricity non-commodity costs*

From an electricity consumer’s perspective, most customers renewing their electricity contract in 2025 will see a notable drop in the Standing Charge costs, mainly due to a significant drop in fixed network charges from 2024 (some up to 50% reductions).

Conversely, consumption-based charges are expected to increase notably from 2025, partly driven by inflationary drivers, and for network charges, partly driven by a re-allocation of some costs away from standing charges and back into Unit Rates and Capacity charges.

Gas third party costs**

As the axis above shows, gas third party charges typically make up only 3-10% of a gas Unit Rate, with commodity costs making up the lion’s share of customers’ Unit Rates.

The majority of third party charges, in the form of network capacity charges and metering costs, reside in a customer’s Standing Charge.

Typically gas third party charge movements are much more sedate than their electricity cousins, though it is important to note that network charges can increase significantly if the nature of a site’s consumption changes.

The most volatile third party charge for gas is the Unidentified Gas charge, which is a cost distributed across all suppliers for gas that is effectively ‘lost’ in the system after leaving the transmission network (due to theft, unregistered sites, to name a few reasons). With commodity prices increasing significantly in 2025, that has driven a notable increase in the level of Unidentified Gas in Unit Rates.

Future uncertainty of third party costs

We are approaching an unprecedented period of uncertainty regarding third party charges.

Whether it be ambiguity over how the Renewable Obligation charge will reduce now the scheme has closed, or the general uncertainty as to how regulatory change will impact network charges, suppliers are struggling to confidently predict how third party charges will behave over the next 5 years.​

Third party forecast variance - bill value (200MWh)

Even in the short term there is significant variation between forecasts for certain charges, and the further out you go, the net variance approaches a staggering 60%.

A lot of the drivers behind this are linked to the drive towards Net Zero, whether it’s the uncertainty around how national demand will increase/decrease in the future as electrification does/doesn’t take hold, or the general shortage of insight available on the charges set up to fund greener generation portfolio.

Aggregated low case forecast (left) and high case forecast (right) – bill value (200MWh)

One of the customer impacts of such divergence is that some suppliers are starting to offer pseudo pass-through products, which factor low case forecasts into the prices, with the caveat that the supplier can re-open prices if expected costs breach the low case forecasts.

From a supplier perspective, the levels of uncertainty pose massive risk to even the larger suppliers. In a market that is returning to its pre-Covid levels of competition between suppliers, suppliers need to strike the balance between price competitiveness and not exposing themselves to significant under-recovery of costs.

In this article

• What are third party costs on a business energy bill?
  • Network charges
  • Policy costs
  • Typical bill breakdown
• Future movements of third party costs
• Future uncertainty of third party costs

Related articles

UK appears to have a new entered a new phase in the energy transition

Energy prices drop on prospects of ceasefire & economic downturn

UK businesses worry about energy price volatility as demand continues to rise

Third party costs outlook - January 2025