Breaking Down Your Electricity Invoice: What Manufacturers Are Really Paying For

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With increasing material costs, supply chain disruptions, and volatile market demands, manufacturers are under increasing pressure. On top of these pressures, managing rising energy costs has become critical for protecting business profitability. For manufacturers, electricity isn’t just a cost, it’s often one of the largest overheads impacting operational efficiency and competitiveness.

A good starting point to manage energy costs effectively is for a manufacturer to understand the makeup of their electricity invoices. Below, we’ll break down the key elements of an electricity invoice, showing what you get charges for and why, as well as outline actionable steps manufacturers can take to manage their energy costs better.

Unit Rate Breakdown

The electricity you pay for is made up of different cost elements, which can be allocated into one of three categories.

1. Wholesale Energy Costs: This is the actual cost of electricity you consume. The wholesale cost is determined by market conditions and currently accounts for approximately 44.8% of your overall invoice (2024/2025).
2. Transmission and Distribution Costs: These are sometimes known as Network and Balancing charges and are required by the District Network Operators (DNOs) and the National Grid in order to deploy and maintain the electricity infrastructure to ensure security of supply to all UK electricity consumers. These costs are approximately 24.7% of your overall invoice (2024/2025).
3. Environmental Taxes and Levies: Government-imposed charges to support environmental initiatives and ensure the stability of the energy market. Over the last 10 years, this has been the single largest contributor to overall energy prices increasing and currently accounts for approximately 30.5% of your overall invoice (2024/2025).

The combined charges for Transmission and Distribution and Environmental Taxes and Levies, now make up over 50% of your electricity bill, and this is expected to rise to 66% in 2028/2029.

Wholesale Energy Costs

The way electricity and gas are purchased in the UK makes it challenging to show the true wholesale rate for an entire year, as each season is traded independently and different businesses deploy different strategies to achieve varying results.

Wholesale electricity costs are driven by market dynamics such as:

• Supply and Demand: High energy demand or limited supply (e.g., due to weather or geopolitical events) can spike costs.
• Seasonal Fluctuations: Winter months often see increased energy usage and higher prices.
• Procurement Strategy: Fixed-price contracts may lock in costs but miss opportunities to benefit from market dips, while flexible purchasing strategies provide more control over when and how energy is bought.

>> Keep track of wholesale energy costs

Managing wholesale costs.

For manufacturers, managing wholesale costs effectively means they can reduce the amount they are charged on 40% of their overall energy costs. Having a strategic procurement strategy in place, like a flexible purchasing strategy, for instance, will let manufacturers take advantage of market trends and secure energy at favourable times to minimise costs.

It’s important to remember that effective energy procurement is not just about securing lower rates, it’s also about aligning your purchasing strategy with your operational and financial goals.

Transmission and Distribution Costs

Electricity invoices include several transmission and distribution charges, which ensure electricity is delivered efficiently and securely.

These charges have been stealthily increasing over the last 20-30 years and more recent changes mean that a higher percentage of charges are based on fixed daily costs rather than indexed to consumption. You can read more about that here.

The main transmission and distribution costs that manufacturers should be aware of are:

Distribution Losses: Energy is lost as electricity travels through low-voltage networks from substations to end users due to resistance and system inefficiencies. The rates for distribution losses are passed to businesses and are indexed to wholesale prices for that period at a rate of 3%.

Transmission Losses: Similar to distribution losses, these occur in high-voltage networks as electricity is transported over long distances. The rates for transmission losses are passed through to business energy consumers and are indexed to wholesale prices for that period at a rate of 1%.

Distribution Use of System (DUoS): These charges are paid to DNOs for the use of their regional networks. DUoS costs cover maintenance, operation, and upgrades. Rates are now set as a fixed £ per day and vary depending on location and capacity requirements.

Transmission Use of System (TNUoS): These charges are collected by the National Grid to fund the construction, maintenance, and operation of high-voltage networks. Charges depend on location and capacity requirements and are applied to both electricity generators and consumers.

Capacity Mechanism (CM): Introduced in 2014 to improve security of supply and protect against blackouts. It works by providing funding to generators and consumers to plug demand or supply-side gaps. Charges are applied as a fixed rate per kWh during winter (November to February, 4 – 7 p.m.) and include an additional operational levy on all electricity consumed.

Balancing Services Use of System (BSUoS): These charges recover the costs of balancing supply and demand in real time, including operating reserves, frequency response, and energy imbalance services. BSUoS costs fluctuate daily and can vary significantly, reflecting the dynamic nature of balancing the grid.

Assistance for Areas with High Electricity Distribution (AAHEDC): This scheme aims to reduce distribution costs for consumers in Northern Scotland and Shetland. Tariffs are calculated for each financial year and are effective from 1st April.

Managing Transmission and Distribution charges.

Manufacturers should assess whether their site’s voltage and capacity (measured in kVA) are accurately classified and utilised. Businesses that are not using their capacity will now find that they are paying a premium on TNUoS, DUoS, and BSUoS charges.

When it comes to transmission and distribution charges, the goal for manufacturers is to have a flat consumption profile rather than one that has peaks and troughs. Rescheduling energy-intensive processes, sometimes referred to as ‘load shifting’, will have the biggest impact on transmission and distribution charges because of the potential to reduce the banding used to calculate DuoS and TNuoS charges.

Reducing overall demand is still a practical way to lower transmission and distribution charges, as some elements are still linked to consumption, but a general reduction in consumption will have a much bigger impact on wholesale costs and environmental taxes and levies.

Environmental Taxes and Levies

Taxes and levies are significant contributors to energy costs for manufacturers. They are essentially a group of charges designed to provide income which can be used to fund government initiatives and environmental programs.

Climate Change Levy (CCL): This tax is designed to encourage energy efficiency and reduce carbon emissions. It applies to electricity, gas, and solid fuels used by businesses across industrial, commercial, agricultural, and public sectors. The CCL is charged as a fixed pence-per-kWh rate on all energy consumed. Energy-intensive manufacturers participating in the Climate Change Agreements (CCA) program may qualify for significant reductions.

Contracts for Difference (CfD): This scheme promotes investment in low-carbon electricity generation by guaranteeing renewable energy generators a fixed “strike price” for the electricity they produce. CfD stabilises revenue for these projects, making renewable energy a more attractive investment. The costs of CfD vary annually depending on wholesale market fluctuations and the amount of low-carbon electricity generated each year.

Feed-in-Tariff (FiT): Launched in 2010, the FiT scheme supports small-scale renewable energy generation, such as solar panels and wind turbines. Eligible participants receive payments for the electricity they generate and export to the grid. Although the scheme is closed to new applicants, existing participants continue to receive payments under agreed terms.

Renewable Obligation (RO): Introduced in 2002 to support large-scale renewable energy projects. While no new contracts are issued under this scheme as it was replaced by CfD in 2017, generators in the scheme will continue to receive support for a further 20 years, meaning businesses will continue to pay charges as a flat pence-per-kWh rate on all electricity consumed to support these existing obligations.

Managing Taxes and Levy charges.

As all environmental taxes and levies are based on a fixed pence per KWh and charged to every KWh consumed, reducing consumption has a direct impact on these charges, i.e. A business that can reduce consumption by 20% will reduce these charges by 20%.

Outside of reducing consumption, businesses should explore levy exemptions to determine if their business qualifies for government relief from any of these charges. Staying up to date on government policies and schemes that offer financial incentives or relief for manufacturers is something many of our clients trust us to do on their behalf.

Download the “Understanding Your Energy Bill” Brochure

To gain deeper insights into the makeup of your electricity invoice and the projected costs for the next five years, download our “Understanding Your Energy Bill” brochure. This comprehensive guide breaks down each element of your energy invoice and offers actionable strategies for manufacturers to manage and optimise their energy spending.