Understanding Non-Commodity Costs in Energy
Non-commodity costs are distinctly separate from commodity costs and relate to the delivery of energy to the consumer. These include transmission charges, distribution charges, and environmental levies imposed by the government. Generally speaking, the commodity cost will be tied to the current market rate and non-commodity costs are passed through a regulatory body to ensure the consumer is being charged fairly.
Non-commodity costs have more than doubled in the past ten years. For instance, in 2013, these costs accounted for roughly 40% of a typical electricity bill. By 2023, they had risen to almost 60% or more of the total bill, reflecting the impact of various policies and infrastructure investments.
Drivers Behind the Increase
Government subsidies
Different subsidies imposed by the UK government have been introduced over time, to help support the implementation of renewable energy generation, with the aim of reducing the reliance on fossil fuels. Despite increased costs to consumers, these subsidies have served their purpose, with solar, wind and biomass now making up roughly 40% of the UK’s electricity mix. Examples of these subsidies include the Renewables Obligation (RO), later replaced by the Contracts for Difference (CfD) scheme in 2017, and the Feed-in-Tariff.
Infrastructure Upgrades
Many renewable energy technologies tend not to be near to the power stations that are required to distribute generated energy to consumers.
Most offshore wind generation is located in Scotland, meaning that a large amount of energy is required to be transported a far distance to the majority of the population. At present, the national grid does not have sufficient infrastructure to do this. The national electricity grid will require significant upgrades to its transmission and distribution infrastructure, which will ultimately lead to increased costs for the consumer.
Balancing the supply and demand of electricity from renewables is more of a challenge compared to fossil fuel resources which are much more predictable. Balancing Services Use of System (BSUoS) costs have increased significantly over the past decade – from £1/MWh in 2011 to £14/MWh last winter. Last year, around £1 billion of BSUoS costs were used to turn off wind farms due to the lack of transmission infrastructure required to utilise the power they generated.
With the transition to renewable energy, we are relying less on gas fired power stations and instead using these to fill in the gaps when there are periods of low generation from the likes of solar and wind. This has led to the introduction of the Capacity Market (CM) charge which is needed to ensure security of supply during periods of peak demand and low generation from renewable sources of power.
Impact on Energy Consumers and Businesses
According to nPower, the non-commodity share on electricity invoices will rise to an estimated 60% of energy bills by the end of 2025. Looking ahead, non-commodity costs are expected to continue rising, although the rate of increase may vary depending on government policies and economic conditions. Estimates suggest that these costs could increase by another 10-20% over the next five years. This forecast considers ongoing investments in grid infrastructure, changes in environmental regulations, and potential new levies or subsidies related to the UK’s transition to a low-carbon energy system. This will ultimately lead to higher energy bills for consumers and businesses.
However, these high energy bills will eventually lead to consumers and businesses being rewarded with declining energy costs once optimal net zero infrastructure is established across the UK.
Strategies for Managing Energy Non-Commodity Costs
The best way to mitigate the financial impacts of increasing non-commodity costs is to invest in improving the fabric efficiency of buildings, implementing energy-efficiency measures and investing in onsite renewable energy solutions.
The increase in energy costs strengthens the business case for investing in renewable energy.
OnGen provides the tools necessary to assess the feasibility of different renewable technologies to help your organisation save energy costs whilst striving to meet its net zero ambitions.
Get in touch today to explore the potential of OnGen Expert.
