How do Third Party Charges Affect your Energy Bill

• Around half of the customer bill is attributable to third party charges (pass through/non commodity/non-energy costs)

• Suppliers are responsible for:

– Paying to move energy to customers

• Network charges

– Paying to balance the system

• Costs incurred by System Operators

– Paying for metering

• Installing, reading, maintaining

– Paying for government policy

• Subsidising generation and energy efficiency

• Electricity and gas networks:

– 3 electricity transmission owners (+ OFTOs) and 6 distribution network owners operating across 14 zones

– 1 gas transmission owner and 5 distribution network owners for 12 regions

• Renewables Obligation (RO)

• Feed-in Tariff (FiT)

• Contracts-for-Difference (CfD)

• Capacity Market (CM)

• Energy Company Obligation (ECO)

• Warm Homes Discount (WHD)

• Climate Change Levy (CCL)

• Carbon Reduction Commitment Energy Efficiency Scheme (CRC)

Suppliers must recover a range of costs from consumer bills:

• Introduced to budget and monitor the costs of policies feeding in the consumer bill –LCF cap set at £7.6bn by 2020 (in 2012 money) – deemed the amount needed to meet our 2020 renewables generation targets

• The Trilemma in action: sustainability and affordability aspects of the Trilemma being linked by budget

• Included:

– RO

– Small-scale FiT

– CfD FiT

• Excluded:

– Renewable Heat Incentive

– Warm Homes Discount

– Capacity Market

LCF project funds

£bn2011-12 prices

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

2018-19

2019-20

2020-21

Total 1.61 2.36 2.97 3.50 4.30 4.90 5.60 6.45 7.0 7.60

Networks

• Heavily regulated

• Complex charging models to create tariffs

• No competitive advantage arising from charges (but operational impact)

• Defined collateral/ credit calls

• Explicit approach to recover charges from different customer (meter) types

• Rules subject to constant change

Policy

• Cost recovery generally less prescriptive

• Suppliers have some leeway regarding how/ when to recover costs

• Many policies designed such that competitive pressures ultimately reduce consumer costs (and therefore real differences between suppliers)

• Relatively stable arrangements for cost recovery

Wholesale Transmission DistributionGovernment

schemes Tax Operating

Electricity

50%-60%extraction, refining, trading

1%-3%providing

assets, system

balancing

15%-20%providing

assets

0%-5%ECO

5%-25%VAT, CCL

1%-10%billing,

metering, margin

35%-45%fuel, operation, maintenance

3%-8%providing

assets, system

balancing

15%-25%providing

assets

5%-15%ECO, RO,

FiTs5%-25%VAT, CCL

1%-10%billing,

metering, margin

Gas

An increase in our forecast costs of the Renewables Obligation and the

Capacity Market in 2017-18 and 2018-19 outweighs a reduction in

our forecast cost of CfDs.

Wholesale Transmission DistributionGovernment

schemesTax Operating

• Connecting renewables

• Gas imports

• NIMBY-ism

• Planning/ parks etc.

• Supply chain

• Materials cost

• Smart grids

• Emissions/ losses

• Embedded generation

• Pipe replacement

• Smart grids

• Maintenance

• Materials costs

• Pensions deficit

• Emissions/ losses

• Targets

• Timeframes (to meet targets)

• Setting subsidy

• Political capital

• Who pays?

• Complexity

• Overlaps

• Political uncertainty

• Affordability

• Who pays?

• Drive behaviour?

• Carbon vs. sales taxes

• Policy/ regulatory compliance

• Sales channels

• IT systems

• Margin

• Market design

• International commodity markets

• Import capacity

• European market opening/ harmonisation

• Disasters/ war

• What about low/ zero cost plant?

• Supplier at the heart of the industry to recover from consumers a variety of costs

• Third Party Charges account for around half a typical dual fuel bill

• Policy and regulatory framework critical for determining how costs will fall