The Ultimate Guide To Non Commodity Costs – What, How and Why?

Introduction

You may keep hearing that energy prices are falling and you’d be right.

Because they are.

Since 2013 wholesale energy prices have been dropping.

But wait.

Why is your energy bill still going up?

The quick answer:

Non-commodity costs.

Over the next nine chapters we’ll delve into the intricacies of non-commodity costs.

And by the end you should have a pretty good understanding of what these things are.

Why they’re going up.

And how you can help protect your organisation against them.

So without further ado – here we go!

Contents

Chapter One – A History of Energy, Bills and Charges

Chapter Two – Understanding What a Non Commodity Cost Is

Chapter Three – The Different Types of Non Commodity Costs

Chapter Four – Transportation and Distribution Non Commodity Costs

Chapter Five – Government Levies and Tax Non Commodity Costs

Chapter Six – How Non Commodity Costs Affect Your Organisation

Chapter Seven – Non Commodity Cost Forecast

Chapter Eight – Breaking Down an Energy Bill

Chapter Nine – Conclusion

   

Chapter One

A History of Energy, Bills and Charges

Before we start digging into non-commodity costs, let’s take a little trip back in time.

*Initiate time machine*

In 1989 the Electricity Act was passed which provided for privatisation of the electricity industry in Great Britain.

Then in the late 90s the full roll out of competition in the energy market began.

Now – fast forward to present day and there are currently 73 active suppliers of energy throughout the UK.

64 suppliers provide both gas and electricity, 7 only provide gas and 2 only provide electricity.

The UK energy market is mainly made up of larger suppliers with 75% of gas suppliers and 76% of electricity suppliers larger providers.

25% of gas suppliers are small to medium providers and 24% of electricity suppliers are 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 despite wholesale energy prices actually falling from 2013 to 2016 by over 10%. Outstripping the cost of all other goods and services.

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

The answer:

Non-commodity costs.

This is charged to retail energy suppliers who pass this cost onto its customers and collect money for the various third parties.

Hence this is where the terms pass through contracts or third party costs come from.

Its forecast that by 2020 non-commodity costs could account for at least 61% of your entire electricity bill!

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

Chapter Two

Understanding What a Non Commodity Cost Is

First, let’s get acquainted with an energy bill.

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

One is the commodity cost. The actual cost of the fuel consumed which is a tradable commodity – gas or electricity.

Two is non-commodity costs. The charges causing energy bills to soar despite cheaper wholesale price of energy.

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

Always rolled up into a single rate for domestic bills or separated at various levels of detail for commercial bills.

These are separate to the commodity cost.

By and large these non-commodity costs are used to cover the cost of system and network charges involved in the running of the distribution and transmission network.

They can also be to cover environmental costs as well as supporting government schemes to incentivise particular reform.

Non-commodity costs accounted for around 23% of a consumers bill in 2009 and is expected to rise to at least 61% by 2020.

To put this in perspective:

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

Chapter Three

The Different Types of Non Commodity Costs

So, let’s look more closely at non-commodity costs and find out exactly what they entail.

On the whole, non-commodity costs can be categorised in two main categories; Transportation and distribution charges Government Levies and Taxes

Examining these categories will help you understand exactly why non-commodity charges exist and what the extra costs go on.

First of all we have Transportation and distribution charges.

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

Let’s quickly define what this actually means.

The transmission is a way of quickling moving large amounts of energy long distances. This can be via high-voltage cables for electricity and high pressure underground pipes for gas. A helpful analogy is to think of transmission as a motorway.

Distribution is the method of taking the energy from the transmission to individual homes and organisations. For safety this is at a much lower voltage and pressure. If you were to experience a power cut it would be the distribution company who would resolve the situation.

These types of non-commodity costs are there to ensure day to day running and upkeep on this vital infrastructure that we all rely on everyday.

We’ll cover all of the main individual non-commodity costs 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:

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 incentivise 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.

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

Chapter Four

Transportation and Distribution Non Commodity Costs

As mentioned above, there are a whole suite of different charges that make up the Transportation and Distribution Non Commodity cost group.

Here we delve a little deeper and find out what each cost is called, what it is and where it goes.

So here we go:

TNUoS – Transmission Network Use of System

 

The TNUoS or Transmission Network Use of System non-commodity cost covers the cost of using transmission network which we discussed in chapter three.

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

DUoS – Distribution Use of System Charges

 

The DUoS or Distribution Use of System Charges is the additional cost that is added to cover the expense of using the distribution network, which we 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; Scottish and Southern Energy Power Distribution, Scottish Power Energy Networks, Northern Powergrid, Electricity Northwest, Western Power Distribution and 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:

Electricity North West Limited

Northern Powergrid

  • Northern Powergrid (Northeast) Limited
  • Northern Powergrid (Yorkshire) plc

Scottish and Southern Energy

  • Scottish Hydro Electric Power Distribution plc
  • Southern Electric Power Distribution plc

ScottishPower Energy Networks

  • SP Distribution Ltd
  • SP Manweb plc

UK Power Networks

  • London Power Networks plc
  • South Eastern Power Networks plc
  • Eastern Power Networks plc

Western Power Distribution

  • Western Power Distribution (East Midlands) plc
  • Western Power Distribution (West Midlands) plc
  • Western Power Distribution (South West) plc
  • Western Power Distribution (South Wales) plc

Fig 1. http://www.energynetworks.org/info/faqs/electricity-distribution-map.html

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

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

In more detail, 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 BSUoS or Balancing Services Use of System cost is paid to the National Grid. This charge allows the National Grid to recover the cost of keeping the entire network in balance.

What this means in real terms, 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 wastage as well as having too little which would cause outages and blackouts.

One of the reasons for this cost growing is due to the move to more renewable energy sources. Renewable energy means many more generators that need managing. Renewable energy is also by and large weather dependent, which brings in another layer of sophistication centred around whether the wind is blowing or the sun is shining.

These new challenges means that balancing the system is much harder than it ever used to be. This 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 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 it has to travel.

Chapter Five

Government Levies and Tax Non Commodity Costs

As with the Transportation and Distribution non-commodity costs, there are an entire suite of different Government Levies and Taxes that are also applicable.

Some of these are more effectual than others, but here we dig into some of the more impactful charges.

FiT – Feed-in Tariff

 

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

The Feed-in Tariff scheme has been devised to accelerate investment in renewable energy technologies. This charge subsides small renewable generators which are necessary for 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 (PV), wind, micro combined heat and power (CHP), hydro and anaerobic digestion (AD).

The main stipulation is that it 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, you could in fact make money by having one of these systems installed.

The charge itself is paid to generators who have been granted accreditation by Ofgem.

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

RO – Renewables Obligation

 

RO or Renewables Obligation 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 energy generated from renewable sources.

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

The charge itself is paid to generators who have been granted accreditation by Ofgem.

CfD – Electricity Market Reform – Contracts for Difference

 

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

This scheme supports large scale renewable energy generation such as large wind farms.

It was recently introduced to be the successor of RO (Renewables Obligation).

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

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

CM – Capacity Market

 

CM or Capacity Market is a cost which is intended to incentivise investment in 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

 

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

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

This in theory should be a strong incentive for organisations to tackle their energy expenditure to reduce their growing costs.

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 next couple of years:

1st Apr 2018 to 31st Mar 2019 0.583 p/kWh or £5.83/MWh

1st Apr 2019 to 31st Mar 2020 0.847 p/kWh or £8.47/MWh

And here are the rates for gas for the next couple of years:

1st Apr 2018 to 31st Mar 2019 0.203 p/kWh or £2.03/MWh

1st Apr 2019 to 31st Mar 2020 0.339 p/KWh or £3.39/MWh

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

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

AAHEDC – Assistance for Areas with High Electricity Distribution Costs

 

AAHEDC or Assistance for Areas with High Electricity Distribution Costs is a non-commodity cost that exists to recover the cost of providing energy to The North of Scotland which 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. It is then passed on to the Relevant Distributor in the Specified Area.

This allows distribution charges to be reduced.

Chapter Six

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?

Well, we have the answer to that.

So read on closely.

As you may have realised, 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 – which 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).

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

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

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

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

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

Shift a percentage of consumption from costly Red bands to slightly cheaper Amber Bands. You may want to try and build on this further by adapting your working practices on a cost benefit project basis.

You should also implement a long term energy efficiency programme with the aim to achieve a sustainable reduction year on year.

Chapter Seven

Non Commodity Cost Forecast

We’ve already deduced 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.

And 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.

We also have rates for 2020 and 2021.

Electricity is £0.00811 for 2020 and £0.00775 for 2021.

Gas is £0.00406 for 2020 and £0.00465 for 2021.

Non-commodity costs are rising year-on-year and industry insiders predict that we can expect to see a 40 to 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 circa £21,000 between 2017 and 2020 even if wholesale costs of energy does not change.

Chapter Eight

Breaking Down an Energy Bill

To help convey what an energy bill is made up of, we’ve broken down the different 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.

Non Commodity Cost Charges p/kWh

Prices in p/kWh Apr 18 Apr 19 Apr 20 Apr 21
DUoS 2.098 2.187 2.296 2.411
TNUoS 0.980 1.070 1.346 1.308
BSUoS 0.290 0.290 0.305 0.320
AAHEDC 0.023 0.024 0.025 0.027
RO 2.280 2.348 2.421 2.542
FiT 0.518 0.544 0.571 0.600
CfD 0.510 0.765 0.925 0.971
CM 0.330 0.351 0.473 0.350
CCL 0.583 0.847 0.889 0.934
CRC 0.903 0 0 0
Total Non Commodity Cost 7.613 8.427 9.252 9.462

Chapter Nine

Conclusion

And 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.

We’ve found out 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.

However!

We’ll be continuing to update this guide so it stays relevant and expands to keep you informed of the changes and plans ahead.

So make sure you check back later for any updates in the non-commodity world!

 

24 Apr 2019

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