Introduction
The wholesale cost of the gas or electricity you use makes up about half of the amount of your overall bill. The rest of your bill is made up of non-commodity costs, also known as non-energy costs. They include network costs, environmental and social costs, supplier operating costs and your supplier’s pre-tax margin. Among these costs are third-party costs, these are costs that are charged to your supplier by the organisations responsible for the cables and pipes that get your energy to your building.
Since they account for around half of the amount of your overall energy bill, understanding how non-commodity costs impact your bill can help you understand steps you can take to manage your energy use and mitigate rising costs.
Non-commodity components associated with electricity costs have experienced a significant rise in recent years and this trend is expected to continue. These increases are unavoidable, and they are primarily driven by the UK government’s efforts to recover funds for supporting its environmental policies.
The government recognises the importance of mitigating climate change and transitioning towards a low-carbon economy. To finance its environmental initiatives, additional charges are being implemented as part of the non-energy components of electricity bills. These charges play a crucial role in securing the necessary resources to accelerate the adoption of renewable energy sources and reinforce the overall decarbonisation of the electricity infrastructure.
Figure 1. Rising non-commodity costs
Understanding non-commodity costs
The non-commodity costs within a UK energy bill can be categorised into several groups.
Government policies, levies and schemes
These costs typically exist to incentivise government environmental schemes supporting green energy and energy efficiency and to cover the costs associated with meeting climate change commitments and reducing carbon emissions. They include levies and charges related to subsidies for renewable energy generation, feed-in tariffs, contracts for difference (CfDs), and the Renewables Obligation (RO).
Network and distribution costs
These costs cover the infrastructure required for the physical transmission and distribution of energy to individual buildings, including the maintenance, upgrading, and expansion of networks and maintaining the National Grid. Network charges include transmission charges and Distribution Use of System (DUoS) charges, which can vary based on location, voltage level, and demand profiles.
Balancing services and ancillary costs
These costs ensure the smooth functioning of the grid and supporting the transition to a more sustainable and resilient energy system. These costs are incurred to manage the real-time balance between electricity demand and supply, addressing fluctuations caused by changes in consumer demand and unexpected changes in electricity generation.
Metering and settlement costs
These costs cover the installation, maintenance, and operation of energy meters, as well as the collection and processing of energy consumption data for billing and settlement purposes.
Regulatory and industry costs
These costs cover the administration, regulation, and governance of the energy market, including costs associated with regulatory bodies, market operators, and industry code development and enforcement.
Definitions of the Non-Commodity components within an electricity bill
While both gas and electricity share some common elements in their non-commodity costs, there are differences in their respective energy infrastructures, environmental obligations, and the specific measures undertaken to ensure a reliable and sustainable energy supply for consumers. There are fewer costs included in a gas bill. Here we have summarised the non-commodity costs included in an electricity bill.
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Non-commodity cost component |
Description |
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Government policies, levies and schemes |
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RO |
To help build a sustainable energy future and meet government climate reduction targets, the UK needs to invest in and support renewable energy generation. Through the Renewables Obligation (RO), all licensed electricity suppliers are obliged to source a set proportion of the electricity they supply from renewable sources. |
|
FIT |
The Feed-in Tariff (FIT) scheme is a is a government incentive that pays renewable energy producers a fixed rate for the electricity they generate and feed back into the grid. |
|
CFD FIT |
The contract for Difference Feed in Tariff (CFD/FiT) scheme is designed to encourage low carbon power generation and provide long-term price stability by providing financial support to renewable energy projects in the UK. |
|
CFD Levy |
The CfD pays for the operational costs of supporting renewable energy projects through Contracts for Difference. It is collected by the Low Carbon Contracts Company who are responsible for making payments to CFD generators. |
|
CCL |
The Climate Change Levy (CCL) is an environmental tax that was introduced in the UK in April 2001. It is applied to businesses and organisations based on their energy consumption and is designed to encourage energy efficiency and to reduce greenhouse gas emissions. |
|
Network and distribution costs |
|
|
AAHEDC HYDRO |
Assistance for Areas with High Electricity Distribution Costs (AAHEDC) was introduced by the Energy Act 2004. It replaces an earlier arrangement, commonly referred to as the “hydro levy”. The initiative is designed to provide financial support and relief to regions or communities facing disproportionately high electricity distribution costs. The north of Scotland is currently the only area specified to receive assistance. |
|
DUoS |
Distributed Use of System (DUoS) charges go towards the operation, maintenance and development of the UK’s electricity distribution networks. DUoS charges are made up of numerous elements including available capacity, standing charge and units (typically split into red, amber and green). DUoS charges are paid to the supplier who then passes them on to the relevant DNO. They may be visible on your bill, or built into your contracted rates. |
|
TUoS |
Transmission Use of System (TUoS) charges cover the cost of using the high-voltage transmission network. These charges contribute to covering the costs of operating, maintaining, and expanding the transmission infrastructure which delivers electricity from power stations to the regional transmission networks. |
|
Balancing services and ancillary costs |
|
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Elexon |
Elexon is a not-for-profit company whose primary role is to facilitate the smooth operation of the electricity wholesale market and ensure accurate settlement of financial transactions among electricity suppliers, generators, and distributors. It does this through the management of the Balancing and Settlement Code (BSC). |
|
Imbalance Risk |
These prices are designed to reflect the prices associated with the Balancing Mechanism Bids and Offers selected by National Grid to balance the energy flows in the Transmission System, as well as reserve scarcity. |
|
EMR/CM Charges |
EMR/CM charges fund the government’s Electricity Market Reform and Capacity Market schemes, ensuring security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. |
|
CM Levy |
The Capacity Market (CM) levy pays for the operational costs to support the Capacity Market scheme that ensures security of electricity supply during times of peak demand. |
|
BSUoS |
The Balancing Services Use of System (BSUoS) charge covers the costs associated with balancing the electricity grid in real time. This cost allows National Grid to ensure security of supply. |
|
RCRC |
Residual Cashflow Reallocation Cashflow (RCRC) is where any excess or shortfall after all Balancing and Settlement Code (BSC) parties have paid their Imbalance Charges is redistributed amongst them, ensuring that the total imbalance charge is zero across all parties. |
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Regulatory and industry costs |
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Supplier Margins |
A supplier’s margin is the difference between the price at which energy suppliers purchase electricity or gas from the wholesale market and the price at which they sell it to end consumers. These margins cover the supplier’s operating costs, customer service, and profit. |
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Metering and settlement costs |
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These costs are site specific and subject to variation and fluctuation depending on your Data Collector (DC) and Data Aggregator (DA provider). |
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Breaking Down an Energy Bill
To help understand how your bill is made up, the graphics below illustrate the broad split between non-commodity costs and wholesale costs in your gas and electricity bill. Note, the energy market is volatile and prices change daily, so the exact split is subject to daily change. Our Market Watch experts track the fundamentals impacting both wholesale energy prices and non-commodity costs, providing our customers with a daily analysis of price movements to help inform procurement decisions.
Figure 2. Wholesale costs vs non-commodity costs
Conclusion
In line with its commitment to sustainable development, the UK government is actively pursuing the decarbonisation of the electricity sector. This involves reducing greenhouse gas emissions, promoting energy efficiency and increasing the share of renewable energy in the electricity mix.
However, such initiatives require substantial financial investment. The increasing non-commodity components of electricity bills serve as a mechanism to generate the necessary funds for supporting these environmental policies. By integrating these charges into electricity costs the government aims to incentivise the shift towards cleaner energy sources, encourage energy conservation, and create a more sustainable and environmentally friendly electricity infrastructure.
Overall, the UK government’s decision to raise the non-energy components of electricity costs reflects its dedication to addressing climate change and promoting a greener future. While these increases may impact consumers in the short term, they play a crucial role in financing the vital initiatives needed for the country’s transition to a low-carbon economy and achieving its environmental objectives.
To mitigate the rising costs, organisations should consider how they can reduce their consumption.
A 10% reduction in overall general energy consumption is widely accepted as achievable with some focus and attention on good energy management.
For a greater reduction in energy consumption, consider an energy audit, which will provide a comprehensive review of the energy used across your site(s) to gain insight into areas where cost effective energy, operating and carbon savings can be achieved. The audit will identify a range of practical low-cost and no-cost measures, together with a range of longer-term investment measures, summarising the quantification of the costs, savings, and estimated return on investment of each opportunity identified.
