In December 2021, the price of wholesale electricity was £240/MWh – five times higher than it was 10 months earlier – and in August 2022 it rose even further, by over 200% to £511/MWh, according to Ofgem data.

The exponential increase led the government to introduce its Energy Bill Relief Scheme for businesses; however, this support ended at the start of April and at the same time many fixed rate deals for businesses came to end. The independent energy research and analytics company, Cornwall Insight, predicted this could push up energy bills by a further 133% for some companies.

Since the start of December 2022, the cost of wholesale electricity has been falling steadily. However, more volatility in the market is predicted over the coming year.

These historically high energy costs have rightly taken the lion’s share of businesses’ attention over the past 18 months; but commodity costs, ie the cost of the actual energy, only make up a certain percentage of a business’ energy bill.

Rising third-party costs
Typically, commodity costs make up around 40% of a business’ energy bill, with the other 60% made up of third-party costs. Third-party costs cover everything from transferring energy from where it is produced to where it is used, to covering the cost of decarbonising the grid.

A recent report into third-party costs by the UK’s largest bioenergy producer, Drax, found that the proportion of an energy bill made up by third-party costs fell to 43%. Despite this fall, third-party costs are now at their highest point ever.  

The vast majority of third-party costs are set to increase in the short term, with the largest increases forecast to be from the amount businesses pay towards renewables obligation, system balancing, feed-in tariffs and the capacity market.

The main reason for the rise in third-party costs can be put down to inflation. However, the volatility in the energy market has also caused costs to rise as the National Grid works to ensure that the energy being inputted into the grid doesn’t fall below demand.

These system balancing charges represent some of the biggest increases in cost. In 2022/2023, the cost was 0.889 pence/kWh, in 2023/2024 it is expected to rise to 1.487 pence/kWh.

With the price of wholesale energy now in a better place, albeit tracking at a higher level than before the invasion of Ukraine, many businesses are now focusing their attention on how they can reduce these third-party costs.

An onsite solution
The only way businesses can reduce their third-party costs is by reducing the amount of power taken from the grid and moving to onsite energy generation. Onsite generation can take many forms, whether through solar PV or hydrogen-ready gas generators.

Having a bespoke energy supply and storage system can give businesses confidence that the energy they’ll use tomorrow is no more expensive than the energy they are using today. Where more energy is generated than the amount needed, businesses can turn to the grid to export it, or with new innovations in the market, transfer it to another site in their portfolio.

Onsite generation may not necessarily be suitable for all businesses, predominantly due to a lack of space or a roof that is unsuitable for solar. Where this is the case, businesses should be considering how to improve their energy efficiency measures.

To effectively manage energy usage in large buildings, it is crucial to have a clear understanding of when and how energy is being consumed. One cost-effective solution is to install automatic monitoring and targeting (AM&T) systems, which provide valuable data for driving efficiency. Additionally, heating, ventilation and air conditioning (HVAC) systems typically account for up to 60% of energy consumption in commercial buildings. By installing or optimising building management systems, significant carbon and monetary savings can be achieved.

The last 18 months have undoubtedly been difficult for businesses, and a large part of this has been driven by the increase in energy costs. However, as wholesale energy costs come down, businesses need to be alert to the fact that further increases in energy bills could be instore as third-party costs rise.

The views and opinions expressed in this article are strictly those of the author only and are not necessarily given or endorsed by or on behalf of the Energy Institute.