What Makes Up The Cost Of Energy?

Guide to non-commodity costs

Non-Commodity: Electricity

Overall in 2020, there was a dramatic decrease in wholesale prices so many thought that overall costs should be reduced. Nevertheless, commodity accounts only for a third of the billed rate for electricity, which restrains the overall effects of the increases in non-commodity charging. The decrease will rebound in 2021 and the benefits of it will not be seen as the industry and the market will correct themselves.

In the next few years, there will be many changes to the charges in the electricity network. These variations can affect what you pay for your tariff.

Key Drivers

  • COVID-19 has resulted in a drop in demand reducing the charging base.
  • Contracts for Difference (CfD) hit a record outturn cost of £7.58/MWh and £7.84/MWh for the first and the second quarter of 2020.
  • Renewable Policy charges are expected to increase by 2%.
  • Demand generation became diversified, which resulted in changes to the structure of network tariffs.

What are non-commodities?

There are several non-commodities:

  • Wholesale Energy
  • Elexon
  • CCL
  • Contracts for Difference (CfD)
  • Renewable Obligation (RO)
  • D UoS
  • Distribution Losses
  • AAHEDC
  • BSUoS
  • Capacity Market
  • Feed in Tariff (FiT)
  • TNUoS
  • Climate Change Levy (CCL)
  • Transmission Losses

2020/21 Energy Cost Breakdown

The table below illustrates the percentage of each non-commodity in the 2020/2021 Energy Cost Breakdown.

Non-commodityPercentage
Distribution Losses2%
Transmission Losses0%
DUoS9%
TNUoS6%
Renewables Obligation (RO)20%
Feed in Tariff (FiT)6%
Contracts for Difference (CfD)8%
Capacity Market4%
CCL7%
BSUoS4%
AAHEDC0%
Elexon0%
Wholesale34%

Transmission Charges (TNUoS)

NUoS costs represent the costs of moving electricity across the UK from power plants to distribution operators. They have traditionally been treated as Triad charges, which measure the average demand at three 30m segments in winter when demand is often greater, and the cost is based on these averages.

There are plans to no longer use Triad charges in 2021-22 to recover TNUoS costs. After the changes, the residual element of charges will have a form of fixed charges rather than Triad measurements. These fixed charges will represent around 80% of all TNUoS charges.

Distribution Charges (DUoS)

Distribution Charges are levies that are paid to the Distribution Network Operators that operate in the UK. DNOs are responsible for delivering energy to customers from substations. DUoS will be reformed after April 2020. After this point business customers will be charged based on voltage, agreed capacity, and consumption. These changes will be reflected in fixed charges for each segment that will apply to all customers.

Policy

Policy covers a number of non-commodities:

  • Renewables Obligations (RO)
  • Capacity Market (CM)
  • Feed-in Tariff (FiT)
  • Contracts for Difference (CfD)
  • Climate Change Levy (CCL).

These charges have been introduced to promote renewable energy generation and encourage people to be more energy-efficient. The fees also aim to make businesses consume less energy. As existing redemptions expire and FiT closes to new applicants in 2019, we should see a drop-off in this fee over the next 5-10 years. That should balance the new charge, which is CfD. As CM was reinstated, all outstanding charges need to be paid and customers are likely to be charged extra to repay the scheme. As several energy suppliers have recently left the market, the costs in all other suppliers are likely to be affected.

Forecasts

Even though forecasts take into consideration industry analytics, as well as market and supplier research, they are likely to change as the circumstances in the market change. For example, between October 2019 and August 2020, certain elements of the forecasts changed. Overall, however, non-commodity costs altogether have increased by 2.3%, which was predicted a year before. That means that if a customer secured these costs the year when a forecast was made, they paid 2.3% less than they would if they paid the fees now.

The individual elements that changed were:

  • Distribution Losses – an increase of 13.1%
  • CfD – an increase of 11.2%
  • BSUoS – an increase of 22.9%.

All these individual changes could have been observed for the same period.

A forecast for 2024/25 suggests that non-commodity rates will increase by as much as 29% from the current rates, and unit-rates are expected to raise by more than 2p per kWh.

Non-Commodity: Gas

Key Drivers:

  • The price for wholesale gas has fallen for 2020/2021 and is now 40% lower than what the forecast in October 2019 predicted.
  • The cost of gas is now 61% wholesale commodity, which has affected the billed rates in 2020.
  • In 2021/2022 the wholesale cost is expected to rebound and the cost of CCL to increase by 15%.

Transportation

There are several types of charges involved in the gas transportation

National Transmission System (NTS)

The NTS charges account for the shipping of gas around the UK. They cover both commodity and capacity elements. For the time being, there isn’t much information available to forecast how they are going to change in the next few years. There are also ongoing negotiations for the prices to be reset in April 2021.

Local Distribution Zone (LDZ)

LDZ costs cover the costs that the distribution networks pay to make gas usable for customers’ meters. There are ongoing negotiations regarding the charges so there is uncertainty surrounding the forecasts.

Climate Change Levy (CLL)

Climate Change Levy is an environmental tax charged on the energy consumed by businesses. The goal of imposing CLL on businesses is to be more energy-efficient and to help them reduce their gas emissions.

CLL has increased significantly from 2018/2019 to discourage the reliance on fossil fuels and to encourage businesses to get their energy from renewable sources. In two years, CLL increased by 100% from 0.203 to 0.406 in 2020/2021. CLL is charged per kWh of energy consumed.

2020/2021 Gas cost Breakdown

The table below illustrates the percentage of each charge in the 2020/2021 Gas Cost Breakdown.

Gas chargePercentage
Climate Change Levy (CLL)26%
Wholesale61%
NTS2%
DNZ11%

Forecasts

Forecasts regarding non-commodity gas costs are very broad because of ongoing negotiations regarding various gas-related charges. Nevertheless, in the year 2022/2023 gas prices, all elements included in the gas cost breakdown are expected to increase. Some predictions include:

  • Wholesale costs increasing from around 1.25p/kWh to 1.40p/kWh
  • NTS increasing from around 1.35p/kWh to 1.45p/kWh
  • DNZ increasing from around 1.45p/kWh to 1.55p/kWh
  • CCL increasing from around 1.90p/kWh to 2.10p/kWh.

These rates are just estimates, however, and they are subject to change.

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