Non Commodity Costs in 2021

INTRODUCTION

You may have been hearing that wholesale energy prices are falling. Well, they are. Since 2013 wholesale energy prices have been dropping.

So, why is your energy bill still going up?

The quick answer:

Non-commodity costs.

Over the next nine chapters, non-commodity costs will be explained and, by the end, you’ll have a better understanding of:

  • what they are,
  • why they’re going up,
  • and how you can help protect your organisation against them.

Here we go!

A History of Energy, Bills and Charges

Before we start, let’s take a little trip back in time.

In 1989 the Electricity Act was passed, and this privatised the electricity industry in Great Britain.

Then, in the late 90s, extreme competition began in the energy market.

Fast forward to the present day and there are currently 73 active suppliers of energy throughout the UK. 64 of these suppliers provide both gas and electricity, 7 only provide gas and 2 only provide electricity.

75% of gas suppliers and 76% of electricity suppliers in the UK are known as ‘larger providers’. The UK energy market is mainly made up of these.

The remaining 25% of gas suppliers and 24% of electricity suppliers are considered small and medium providers.

In 2009 energy companies were told that they must publish annual statements which showed their revenues and profits, as well as how they generate and supply energy. The purpose of this is to make profits clearer for consumers to understand.

Since 2003 energy bills have soared, exceeding the cost of all other goods and services, despite wholesale energy prices actually falling from 2013 to 2016 by over 10%.

So, why do energy bills continue to rise if the actual cost of energy is getting cheaper?

The answer:

Non-commodity costs.

Non-commodity costs are charged to retail energy suppliers. They then pass this cost onto their customers and collect money for the various third parties (this is where the terms ‘pass-through contracts’ or ‘third party costs’ come from).

So, now we have a bit of background, what exactly is a non-commodity cost?

Understanding What a Non-Commodity Cost Is

First, let’s understand an energy bill.

An energy bill is made up of two different groups of charges.

The first is the commodity cost. This is the actual cost of the fuel consumed (aka gas or electricity). Gas and electricity are known as tradable commodities.

The second is the non-commodity costs. As previously mentioned, these are the charges causing energy bills to soar despite the cheaper wholesale price of energy.

In short, non-commodity costs are charges added to an energy bill. They originate from the government and third parties (such as distribution companies, for example).

Non-commodity costs are either rolled up into a single rate for domestic bills or separated into more detailed groups for commercial bills.

Remember, these are separate to the commodity cost.

Essentially these non-commodity costs are used to cover the cost of system and network charges. These are incurred through the running of the distribution and transmission network.

They can also cover environmental costs, as well as supporting government schemes to encourage reform.

Non-commodity costs accounted for around 23% of a consumer’s bill in 2009 and are expected to rise to at least 64% by 2021.

To put this in perspective:

A site with an annual consumption of 1,000,000 kWh will see an increase of around £21,000 between 2017 and 2020 even if the wholesale cost of energy does not change.

The Different Types of Non-Commodity Costs

Let’s look closer at non-commodity costs, and find out exactly what they involve.

Non-commodity costs can be categorised into two main categories:

  1. Transportation and Distribution charges,
  2. Government Levies and Taxes.

Understanding these categories help to explain why non-commodity charges exist and what exactly this extra cost goes on.

First of all, we have Transportation and Distribution charges.

These types of non-commodity charges are used to cover the costs of the physical transmission and distribution of energy.

Let’s quickly define what this actually means.

Transmission is a way of quickly moving large amounts of energy across long distances. This can be via high-voltage cables for electricity or high pressure underground pipes for gas. Try to think of transmission as a motorway for gas and electricity.

Distribution is the method of taking the energy from the transmission to individual homes and organisations. This is at a much lower voltage and pressure than transmission for safety purposes. If you were to experience a power cut it would be the distribution company, not the transmission company, who would resolve the situation.

These types of non-commodity costs exist to ensure day-to-day running and upkeep of the energy infrastructure.

We’ll cover all of the main individual non-commodity costs of this category in the next chapter, but here a few major ones to know:

  1. TNUoS – Transmission Network Use of System
  2. DUoS – Distribution Use of System Charges
  3. BSUoS – Balancing Services Use of System
  4. Transmission and Distribution Losses

Now onto the second type of non-commodity cost called Government Levies and Taxes.

These, as you may have deduced, are additional charges that come from the government or third parties.

Typically these extra costs exist to encourage particular schemes which tie in with new legislation.

For instance, there are charges based on the government’s plan to improve investment in renewable energy technologies.

Again, we’ll cover these in more detail in a few chapters’ time, but here are a few major ones to be aware of:

  1. FIT – Feed-in Tariff
  2. RO – Renewables Obligation
  3. CFD FIT – Electricity Market Reform – Contracts for Difference
  4. CM – Capacity Market

Transportation and Distribution Non-Commodity Costs

As mentioned in Chapter Three, there are many different charges that make up the Transportation and Distribution non-commodity cost group.

We’re now going to delve a little deeper and find out what each cost is called, what it is, and where it goes.

TNUoS – Transmission Network Use of System

The Transmission Network Use of System (TNUoS) non-commodity charge covers the cost of using a transmission network (discussed in Chapter Three).

This cost is paid to the National Grid, allowing them to replenish the cost of installing and maintaining the Transmission Network in England, Wales, Scotland and offshore.

DUoS – Distribution Use of System Charges

The Distribution Use of System Charges (DUoS) is the additional cost that is added to cover the expense of using the distribution network (outlined in Chapter Three).

This charge is paid to one of six Distribution Network Operators based on the area in which your meter is located.

These include:

  1. Scottish and Southern Energy Power Distribution,
  2. Scottish Power Energy Networks,
  3. Northern Powergrid,
  4. Electricity Northwest,
  5. Western Power Distribution,
  6. UK Power Networks.

These six groups actually own 14 smaller Distribution Network Operators (DNOs). Here is a more in-depth breakdown of how they are structured:

Northern PowergridScottish and Southern EnergyScottishPower Energy NetworksUK Power NetworksWestern Power DistributionElectricity Northwest
Northern Powergrid (Northeast) Ltd.Scottish Hydro Electric Power Distribution plcSP Distribution LtdLondon Power Networks plcWestern Power Distribution (East Midlands) plcElectricity Northwest Ltd.
Northern Powergrid (Yorkshire) plcSouthern Electric Power Distribution plcSp Manweb plcSouth Eastern Power Networks plcWestern Power Distribution (West Midlands) plc

 

 

 

 
   Eastern Power Networks plcWestern Power Distribution (South Wales) plc 
    Western Power Distribution (South West) plc 

In addition to these 14 DNOs there is a small, but growing, group of independent networks

This non-commodity charge ensures you receive power to your home or office with limited disruption or outages as the cost goes towards the operation, maintenance, and development of the distribution networks.

To clarify, the DUoS essentially covers the cost of distributing electricity from the national grid to your location by way of a local distribution zone.

BSUoS – Balancing Services Use of System

The Balancing Services Use of System (BSUoS) cost is paid to the National Grid. This charge allows the National Grid to replenish the cost of keeping the entire network in balance.

What this means is that, at any given time, there is the right amount of electricity pulsing around the network.

You need to avoid having too much (which creates waste) as well as having too little (which would cause outages and blackouts).

One of the reasons for this cost growing is as a result of the move to more renewable energy sources. Renewable energy results in many more generators and these need managing. It is also typically weather dependent. For example, wind turbines don’t work without wind, and solar panels don’t work without sufficient sunlight. Any system that uses renewable energy has to keep this in mind and prepare for good and bad weather.

These new challenges mean that balancing the system is much harder than it ever used to be. It now requires more complicated and advanced systems which need to be paid for, hence the increase in this particular non-commodity cost.

Transmission and Distribution Losses

Transmission and Distribution Losses is the final, key non-commodity charge you need to make sure you’re aware of.

As it sounds, this cost is used to cover the loss of any electricity which may occur as it travels around the network.

These losses are currently unavoidable and are a result of technical and commercial factors as well as the length of cables or the distance electricity has to travel.

Government Levies and Tax Non-Commodity Costs

As with the Transportation and Distribution non-commodity costs, there are various types of Government Levies and Taxes. Some have more impact than others, but we’re going to look at a few of the more significant ones next.

FiT – Feed-in Tariff

Feed-in Tariff (FiT) is a levy which has been imposed upon energy suppliers in order to support the Feed-in Tariff scheme.

The Feed-in Tariff scheme aims to increase investment in renewable energy technologies. This charge pays for small renewable generators which are necessary to manage solar panels on domestic roofs etc.

The Government launched this scheme back in April 2010 with the aim of rewarding energy customers who have access to their own small scale power generation, typically from installing solar panels or wind turbines.

The scheme is available to anyone who has installed (or will install) one of the following; solar photovoltaic/solar panels (PV), wind, micro combined heat and power (CHP), hydro and anaerobic digestion (AD).

The main limit on the scheme is that the energy you generate must not exceed a capacity of 5MW or 2kW for micro-CHP.

There is also a chance, should you produce and return more energy back to the grid than you use, that you could in fact make money by having one of these systems installed.

The money is paid to those who have been formally recognised by Ofgem.

It is thought by industry insiders that all UK organisations can expect to pay an extra £7.42 on their combined energy costs by 2019 if they don’t take action to reduce their consumption and efficiency.

RO – Renewables Obligation

Renewables Obligation (RO) was a levy imposed on suppliers to support the Renewables Obligation scheme.

The RO scheme supports large-scale renewable electricity generation, such as large wind farms.

This was introduced to help the Government meet its 2020 target of having 15% of all the country’s energy generated from renewable sources.

The RO scheme is actually closed to new applications but does continue to support existing generators.

The money is paid to generators who have been officially recognised by Ofgem.

CfD – Electricity Market Reform – Contracts for Difference

Contracts for Difference (CfD) is a levy introduced to support the Contracts for Difference scheme.

This scheme was recently introduced to be the successor of RO (Renewables Obligation). Hence it also supports large scale renewable energy generation, such as large wind farms.

Generators with a CfD certificate have a contract with the Low Carbon Contract Company (LCCC) or have been appointed by the government.

Having this contract guarantees generators a fixed price of any electricity that they export back to the grid.

CM – Capacity Market

Capacity Market (CM) is a cost which is intended to encourage investment into more sustainable, low carbon electricity capacity.

This secures additional winter capacity from generators and Demand Side Response providers.

Based on an auction system, successful bidders receive stable payments in exchange for committing to supply energy when it is required.

CM is required to ensure there is enough electricity supply for the future.

This charge is paid by electricity consumers based on their consumption during the winter season.

CCL – Climate Change Levy

Climate Change Levy (CCL) was introduced in a bid to reduce carbon emissions. The levy is designed to incentivise organisations to reduce their energy consumption and become more energy efficient.

This works by adding a tax onto energy that is delivered to non-domestic users in the UK or charging 5% VAT rated bills. This is important to note as many customers do not realise this.

In theory, this should be a strong incentive for organisations to tackle their energy use in order to reduce their outgoing cost.

Organisations are taxed on the kWh of gas and electricity shown on their invoice. There are separate rates for both gas and electricity.

Here are the rates for electricity for the past two years:

1st Apr 2018-31st Mar 20190.583 p/kWh or £5.83/MWh
1st Apr 2019 to 31st Mar 20200.847 p/kWh or £8.47/MWh

And here are the rates for gas for past two years:

1st Apr 2018 to 31st Mar 20190.203 p/kWh or £2.03/MWh
1st Apr 2019 to 31st Mar 20200.339 p/KWh or £3.39/MWh

CCL is reviewed every April and is then increased by a small amount.

That said, once the Carbon Reduction Commitment (CRC) is ended in 2019 this amount is increased by will be much higher.

AAHEDC – Assistance for Areas with High Electricity Distribution Costs

Assistance for Areas with High Electricity Distribution Costs (AAHEDC) is a non-commodity charge that exists to replenish the cost of providing energy to The North of Scotland (this is currently the only area to receive assistance).

AAHEDC was introduced in the Energy Act 2004 which replaced an earlier agreement, commonly referred to as Hydro Benefit, which ended in January 2004.

The National Grid recovers an Assistance Amount through the scheme. This is then passed on to the Relevant Distributor in the Specified Area.

This non-commodity cost allows distribution charges to be reduced.

How Non-Commodity Costs Affect Your Organisation

Now you’ve learnt all about the types of non-commodity costs, and what purpose they serve, you might be wondering how this will affect your organisation.

Read on to learn the answer…

Both individuals and organisations are seeing their energy bills soar despite falling wholesale energy costs.

As we’ve established, this is due to all the different non-commodity costs applied to your bill.

What this might mean is that, if your annual consumption was 1,000,000 kWh, you are likely to see a £21,000 increase between 2017 and 2020. This is a lot more money to have to find from your budget.

In 2017/2018 the RO and CCL alone added an additional £41/MWh to your bill (4.1p/kWh).

With non-commodity costs set to equate to at least 61% of your entire bill it is imperative that you implement an energy plan to manage this increase and minimise the financial impact as much as possible.

Here are some quick tips that organisations can consider to help reduce these rising costs:

  1. Organisations should look to reduce their overall general energy consumption by 10%. This is widely accepted as achievable with some focus and attention on good energy management.

Then, based on the banded scheme (you pay more depending on which time of the day you use energy) you should try and do the following:

  1. Shift a percentage of your energy use from costly Red bands to slightly cheaper Amber Bands. You may want to try and build on this further by working around times which are cheaper when energy is cheaper.
  2. You should also implement a long term energy efficiency programme, with the aim to achieve a sustainable reduction in energy use year-on-year.

Non-Commodity Cost Forecast

We’ve learned that non-commodity costs are on the up and are likely to contribute to at least 61% of your total energy bill in the not-too-distant future. However, let’s examine exactly which non-commodity costs are having the biggest impact.

One of the largest is the CCL or Climate Change Levy. With the abolishment of the CRC this levy is due to increase considerably from April 2019.

From 2019 CCL rates are going to increase to £0.00339 per KWh for gas and £0.00847 per KWh for electricity.

Compared to the rates for 2017/2018 this is an average increase of over 50% in CCL costs.

See below the increasing rates for electricity in 2020 and 2021:

2020£0.00811
2021£0.00775

And the increased rates for gas, below:

2020£0.00406
2021£0.00465

Non-commodity costs are rising year-on-year and industry insiders predict that we can expect to see a 40-45% increase by the year 2028.

So, in other terms, a site with an annual consumption of 1,000,000 kWh will see an increase of around £21,000 between 2017 and 2020 even if the wholesale cost of energy does not change.

Breaking Down an Energy Bill

To help explain what an energy bill is made up of we’ve broken one down into parts.

Here you can see how much of the bill goes to which costs or schemes.

*Please note these non-commodity costs relate to Electricity, however a similar breakdown of charges is applicable to Gas*

Typical Non-Commodity Cost Charges p/kWh:

Prices in p/kWhApr 18Apr 19Apr 20Apr 21
DUoS2.0982.1872.2962.411
TNUoS0.9801.0701.3461.308
BSUoS0.2900.2900.3050.320
AAHEDC0.0230.0240.0250.027
RO2.2802.3482.4212.542
FiT0.5180.5440.5710.600
CfD0.5100.7650.9250.971
CM0.3300.3510.4730.350
CCL0.5830.8470.8890.934
CRC0.903000
Total Non-Commodity Cost7.6138.4279.2529.462

Conclusion

There we have it, almost everything you could possibly want to know about non-commodity costs.

We’ve looked at the history of an energy bill, studied the two main groups of non-commodity costs, and examined the individual costs and schemes themselves, learnt that non-commodity costs are rising (and will soon make up at least 60% of your entire energy bill), and we’ve broken down a generic energy bill.

Hopefully, you’re confident that you’ve learnt

  • what non-commodity costs are,
  • why they’re going up,
  • and how you can help protect your organisation against them.