Every energy bill comprises various components, many of which might appear complex to the average consumer. One important part of your energy bill that might not be clear is the Distribution and Transmission Charges, often referred to as “Pass Through Charges”. These are charges that your energy supplier does not control, but passes through to you, the customer, as part of your energy costs.

Energy Bills: More Than Just Energy Usage

While the actual energy you consume – the gas you use to heat your building, the electricity that powers your devices – makes up a significant portion of your bill, it’s far from the only cost. In fact, the energy component and supplier’s cost represents approximately 75-80% of your bill. The remainder is made up of a host of other charges.

These other charges, often referred to as pass-through charges, cover a variety of costs in the supply chain. They’re like the shipping and handling of the energy world. Some of these costs have always been present but were previously hidden in either the standing charge, the unit rate, or a combination of both. However, an increasing number of suppliers are choosing to show some Pass Through Charges separately when billing clients.

What are Pass Through Charges?

Pass-through costs are fees paid to various entities involved in the electricity network. These costs are associated with the operation and maintenance of the electricity network. The electricity network comprises the infrastructure and companies who operate and maintain this infrastructure to ensure the efficient distribution of electricity to all consumers.

In your electricity contract, especially if it’s a pass-through contract, these charges will be clearly defined. They encompass a range of costs, including the standing charge, the commodity and non-commodity costs, and the distribution use of system (DUoS) charges.

The standing charge is a daily fee that covers the basic cost of supplying electricity to your premises. It includes the cost of maintaining the national grid and the costs incurred by your energy supplier to manage your account.

The commodity cost is simply the price you pay for the actual energy you consume. Non-commodity costs, on the other hand, cover everything else, such as the costs of transmitting electricity across the network, and costs associated with government-imposed levies and tariffs aimed at supporting renewable energy solutions.

Distribution Use of System (DUoS) charges are fees paid to the companies that operate and maintain the local electricity network. These charges cover the cost of distributing electricity from the national grid to your business.

Breaking Down the Costs

Wholesale costs: These are what you pay for the energy bought to supply your home or business. They make up about a third of your energy bill².
Network costs: These are for the gas pipes and electricity cables that carry energy across the country into your home or business. Network companies charge your supplier an Ofgem-regulated price for their use of the energy network.
Social and environmental obligation costs: Larger suppliers have to help pay for government energy policies. These costs could cover schemes to support energy efficiency improvements in homes and businesses, help vulnerable people and encourage the take-up of renewable technology.
Other direct costs: These cover costs for things like third-party services, such as sales commissions and brokerage, meter maintenance and installations, administration from data and settlement services like Elexon and Xoserve, and wider smart metering programme costs.
Supplier operating and margin costs: When suppliers set their prices they will try to cover their operating costs as well as make a profit.

Distribution and Transmission Charges Explained

Distribution and Transmission Charges are costs associated with delivering energy from the point of generation to your home or business. These include expenses related to maintaining the infrastructure necessary for energy transmission, ensuring a reliable supply of energy, and covering various levies and fees associated with the energy sector.

Two primary components are the Distribution Use of System (DUoS) and the Transmission Network Use of System (TNUoS) charges. DUoS relates to the cost of running and maintaining the local distribution network, while TNUoS covers the costs of installing, maintaining, and operating the wider transmission system

What is CCL (Climate Change Levy)?

The Climate Change Levy (CCL) is a key component that appears on energy bills, specifically designed as a government-imposed tariff targeting energy products used for lighting, heating, and power. This tax is paid based on your actual energy consumption, meaning the more kilowatt-hours (kWhs) you are billed for, the higher the levy you pay.

The CCL was instituted as part of the UK government’s environmental strategy to mitigate the effects of climate change and to incentivize energy efficiency and conservation in the business sector. By levying a tax on energy usage, the government aims to encourage businesses to reduce their energy consumption and invest in renewable energy solutions.

Under the scheme, certain energy-intensive industries and businesses that take measures to improve their energy efficiency or reduce their carbon emissions can apply for a discount on the CCL. This is part of the government’s broader strategy to transition to a low-carbon economy, fostering the use of renewable energy, and encouraging sustainable business practices.

One important aspect to note about the CCL is that it is considered a pass-through charge.

What is RO (Renewables Obligation)?

The Renewables Obligation (RO) is a critical part of the UK’s strategy for encouraging the generation of electricity from renewable sources. Instituted by the government, the RO is a charge that is collected by energy suppliers from all energy consumers.

The Renewables Obligation operates as a pass-through charge. This means that the cost is not directly related to the production or supply of energy, but is instead a levy that energy suppliers collect from consumers and pass on to fund the growth of renewable energy generation.

The RO works by placing an obligation on UK electricity suppliers to source an increasing proportion of their electricity from renewable sources. To meet this obligation, suppliers can either generate renewable electricity themselves or purchase certificates, known as Renewables Obligation Certificates (ROCs), from other renewable electricity generators. This scheme effectively creates a market for ROCs, which provides additional income for renewable generators and incentivizes the construction of more renewable energy infrastructure.

The money collected from the RO charge goes “into the pot” to subsidize generators of electricity from renewable sources. This subsidy is levied by the suppliers because it is a government requirement, designed to encourage the production of renewable energy and reduce the UK’s carbon emissions.

What is FiT (Feed in Tariff)?

The Feed-in Tariff (FiT) is a government-imposed levy collected from all energy consumers who are supplied by the main energy companies. It was introduced as an incentive paid to businesses and property owners who generate on-site renewable energy, thus encouraging the distribution of electricity from renewable sources.

What is the Transportation Charge?

The Transportation Charge is a fee that appears on energy bills, particularly gas bills, in the United Kingdom. This charge is made by the National Grid, the organization responsible for the national transport of gas through the gas network, to cover the costs of transporting gas from the supplier to the customer.

The gas network includes the National and Regional Transmission systems as well as the low and medium pressure distribution systems. The Transportation Charge is designed to cover the costs associated with these systems, ensuring that gas can be efficiently and safely delivered to businesses and homes across the country.

The Transportation Charge is made up of three elements, each of which is dependent on the locations of the particular terminal and offtake site:

Capacity Charge: This is a fee that covers the cost of delivering gas to a business based on its demand on the system for the coldest day of the year. The capacity charge ensures that the network can cope with peak demand periods, particularly during the winter months.
Commodity Charge: This is a volume-based charge that varies depending on the amount of gas transported through the network.
Site Charge: This charge covers the fixed costs associated with operating supplier-owned above ground storage facilities for liquefied natural gas and propane. It is important to note that this is not applicable to all customers.

In addition to these components, the Transportation Charge also includes a charge for reading your meter and charges for pipeline replacement and maintenance.

Breakdown of Other Common Distribution and Transmission Charges

In addition to the ones discussed so far, there are also several other common pass through charges, each with its unique purpose:

Availability Charge (kVA): This refers to the limit of capacity for a site, set and charged by the local Distribution Network Operator (DNO). It covers investment and maintenance of the electricity network.
Excess Availability Charge: A fee for supply capacity delivered in excess of the Agreed Supply Capacity.
Reactive Power Charge (KVAR): This charge pertains to the difference between the electricity supplied and the electricity converted into useful power.
Data Collection and Aggregation Charges: These are fees paid for determining the energy consumption of the supply and aggregating the meter reading data.
Meter Operation Charge: A fee for installing and maintaining the meter.
Assistance for Areas with High Electricity Distribution Costs (AAHEDC) Charge: This charge is designed to reduce the costs to consumers of the distribution of electricity in certain areas.
Settlement Agency Fee: This covers the costs of reimbursements and recoveries between different parties in the supply chain.
Distribution Loss (DLoss) and Transmission Loss (TLoss): These charges cover energy lost as heat as it travels through the distribution and transmission wires.

Each of these charges has a specific purpose, and they are all necessary for the operation and maintenance of the energy infrastructure.

Pass-Through vs Fixed Contracts Options

When it comes to business electricity contracts, you essentially have two main contract options: pass-through contracts and fixed contracts. In a fixed contract, all costs are included in the unit price, providing businesses with a consistent price for the duration of the contract, and offering some level of certainty and peace of mind.

In contrast, in a pass-through electricity contract, non-commodity costs are separated from the commodity cost. These costs may vary over time, and are usually determined by the regulator and are charged by the supplier. As these costs can fluctuate, this can make pass-through contracts less predictable than fixed contracts. However, they can also provide an opportunity for businesses to benefit from reductions in non-commodity costs.

When choosing your energy contract, it is essential to consider your business’s specific needs and risk tolerance. A fixed contract might be the right choice for you if you value price certainty and want to protect yourself from potential price increases. A pass-through contract might be more suitable if you are willing to accept some level of price risk in exchange for the potential to benefit from price decreases.

While no single type of contract is correct for every business, understanding pass-through charges and their role in your electricity contract can help you make an informed decision. It can also ensure that you can keep up to date with changes to ensure a genuine comparison of contract options. So, when it comes to energy supply, there is no ‘one size fits all’. Contracts are designed to suit the varying demands of UK business consumers, ranging from the small shop to the large factory assembly line. Knowing which type of contract is correct for your needs is key to achieving an effective energy solution.

A Shift in Billing Practices

In recent years, there has been a shift in how suppliers manage these pass-through costs. As these costs fluctuate and are not entirely within the control of suppliers, an increasing number of them have opted to show these charges separately on the bill. This new level of transparency allows customers to see exactly what they’re paying for and why.

This shift is also a reflection of the changing realities in the energy sector. Costs associated with maintaining the network, supporting renewable energy, and meeting regulatory obligations have been increasing. Where a supplier might have traditionally absorbed any price increases, they are no longer prepared or able to do so. As a result, these increases are passed on to the end user, sometimes even mid-contract.

The Future of Energy Costs

Looking to the future, energy costs are influenced by a variety of factors. For example, a new paper in the Journal of Regulatory Economics has explored the relationship between the fluctuation of energy prices and pass-through rates. The research found that when energy prices increase, the pass-through rate is less than one, meaning that suppliers do not pass on the full cost increase to consumers. However, when energy prices decrease, the pass-through rate is greater than one, meaning suppliers pass on more than the full cost decrease to consumers. This might be due to a variety of factors, including market competition and regulatory interventions.

To ensure you’re getting the best deal on your energy costs, it’s beneficial to have a solid understanding of your energy bill. By knowing what each charge represents, you can make informed decisions about your energy consumption and potentially find areas where you could make savings.

Understanding Your Energy Bill: Pass Through Charges