Understanding Non-commodity costs

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    Guide Author

    James Longley

    Managing Director

    min read
    Last Updated September 29, 2022

    Wholesale energy prices have fluctuated over the last year due to a variety of factors. COVID lockdowns were one of the first reasons prices began to rise and since then prices have hit record-breaking highs.

    The UK energy market has been extremely volatile and one of the reasons for this is due to an increase in non-commodity charges.

    We know that non-commodity and commodity costs can be difficult to understand but our energy experts are here to help break down all these costs and what they mean for you.

    A complete guide to non-commodity charges

    Transmission Network Use of Systems (TNUoS)

    The most marked increases relate to charges for transmission and distribution losses. This charge covers the cost of installing and maintaining the transmission system.

    This cost is increasing due to the upgrade of networks to accommodate renewable generation and to replace ageing infrastructure.

    The average increase in the customer for 2016/17 was 16%. From April 2023, how TNUoS is charged moves from a calculated charge to a fixed charge.

    Renewable Obligation

    This is the main framework to incentivise the construction of large-scale renewable electricity generation.

    Although this scheme is closing to new entrants this year, RO will still be a significant charge on customers’ bills for several more years.

    Feed In Tariff Contracts for Difference (FiTCfD)

    Contract for difference (CFD) generators has a contract with the government-appointed Low Carbon Contract Company (LCCC), guaranteeing them a fixed price for their exported electricity.

    The subsidy payment for these generators is paid for by electricity consumers through their suppliers.

    This scheme has replaced the RO and FiT charges.

    Feed in Tariff (FiT)

    FiT is a subsidy scheme introduced in 2010 to support small-scale renewable generation.

    The subsidy payment for FiT generators is paid for by electricity consumers.

    Capacity Market (CM)

    A scheme to secure additional winter capacity from both generators and Demand Side Response providers.

    Successful bidders receive stable payments in return for a commitment to delivering energy when required.

    This is needed to help secure electricity supplies for the future. The subsidy payment for these generators is paid for by electricity consumers on their consumption in the winter period.

    Distribution Use of System (DUoS)

    This charge is paid to the Distribution Network Operator that works in the area where the meter is located.

    From April 2022, DUoS charges are changing from a calculated charge to a fixed charge as a part of Ofgem’s Targeted Charging Review.

    Balancing Services Use of System (BSUoS)

    Balancing the system and making sure there is enough generation to cover demand is becoming increasingly more difficult and costly, particularly in times of peak demand and when unreliable renewable generation is low.

    From April 2021, BSUoS charges are being calculated differently, moving from a net to a gross charge. All these updates from Ofgem are likely to affect your bill for the next few years. If you are unsure what TCR could mean for your business, you can find everything you need to know here.

    Climate Change Levy (CCL)

    This tax was put in place to encourage a reduction in carbon emissions.

    Buyers of renewable energy were exempt from this tax until 2015 when the Government’s budget made the change to apply this charge to all energy users.

    Every April this charge is reviewed and increases by a small amount.

    Carbon Reduction Commitment (CRC)

    CRC is a mandatory scheme aiming to support the target to reduce achieve an 80% reduction in UK carbon emissions by 2050.

    How Non-Commodity Charges Affect Your Business

    Now we have broken down the individual charges that make up non-commodity charges, you may be wondering how this affects your business.

    When wholesale energy costs dip, many businesses are seeing their energy bills soar. This is due to the non-commodity prices that are applied to your energy bill.

    Non-commodity charges can account for an estimated 60% of your energy bill, you must implement energy-saving solutions to reduce the overall general energy consumption of your business.

    Why are wholesale energy prices rising?

    Due to many geopolitical factors, there were massive fluctuations in prices since the start of the year. Additionally, the easing of COVID restrictions and people returning to work also caused energy usage to rise.

    The Russian invasion of Ukraine had a detrimental effect on gas prices as Russia previously supplied 40% of Europe’s gas. The war forced European nations to consider and review how reliant they are on Russian energy with EU nations, the UK and the even USA thinking about and amending their renewable targets.

    Nevertheless, the help remains very welcome as we all appreciate that electricity prices are still high and as electricity is heavily influenced by the cost of gas there is no immediate end in sight to the current crisis.

    How will the rising rate of inflation impact non-commodity costs?

    Non-commodity costs are indexed to inflation, to ensure network owner or generators’ income increases to reflect any increases in inflation.

    The recent increases in Feed in Tariff (FiT), Renewable Obligation (RO) and Contracts for Difference for 2022/23 reflect a higher rate of inflation than historic forecasts.

    The FiT prices paid to generators are adjusted by Ofgem each year using the (Retail Price Index) RPI rate published in January before the start of the financial year in April.

    The Renewable Obligation Buy Out Price for supplier payments and Renewables Obligation Certificates (ROCs) paid to generators are determined each year using the calendar average of RPI.

    CFD Obligation uses a complex CPI adjustment that also factors in BSUoS (Balancing Services Use of System charges) rates and network losses, which is applied to each generator’s agreed payment prices each year – resulting in an increase in expected prices for 2022/23.

    Network Costs – Electricity and gas network owners use a blend of CPiH (CPI + Housing costs) and RPI to adjust their yearly allowed revenue collections.

    Alongside a rising and fluctuating commodity market, the increases in non-commodity costs create an extremely challenging environment for suppliers and customers alike, which means that in the short term we are all going to have to pay more.

    To find out more information on this, check out our business insights page to explore the energy crisis and the effect it is having on businesses.

    Find out more information

    Within this guide, we have covered what non-commodity charges are, a full breakdown of each cost and how they affect your business.

    For more information on non-commodity charges, contact us today at 01858 410000 to speak to one of our energy experts.

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    ? What does this mean?
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