What are non-commodity costs and how do they impact your utility bills?
What’s driving up your business energy bills?
What are non-commodity costs?
The total amount we pay for energy can be broken down into three different charges. First is the wholesale price of the actual amount of power we use (the commodity). Then there is the cost of the power lines supplying the energy to our homes. And finally, a variety of government fees and taxes. The energy companies divide these non-commodity costs between all their customers as part of your monthly or quarterly bill.
In 2011 non-commodity costs accounted for around 36% of energy prices. By 2021 this has risen to 64%. It is expected that they will make up around 70% of our utility bills by the end of this decade.
In simple terms, the non-commodity charge is calculated by dividing the cost of providing energy to the nation by how much we use. When we use more, higher demand drives the wholesale price up, and non-commodity costs down. But as we move towards net zero and buildings becoming more efficient, businesses may face higher non-commodity fees despite falling wholesale prices.
So, what do these non-commodity costs cover, and how can you make sure you’re not paying more than you have to?
Transmission and distribution costs
Building and maintaining a network of cables, pylons and transformers comes at a cost. These costs vary from provider to provider and depend largely on the type of power plant supplying the power. This is because there must be a balanced and consistent supply flowing across the network to prevent damage or power cuts. Renewable power from solar and wind generators is less predictable than gas or nuclear power. Meaning that the inevitable shift towards renewable energy would likely result in higher costs for balancing the system.
Government levies and taxes
These taxes largely fund green energy programs led by the government. But they also help pay for environmental programs across the country.
How did Covid-19 impact non-commodity costs?
Covid-19 has had a big impact across the economy, including energy costs. Some non-commodity fees are set at the beginning of each year and weren’t initially affected by national lockdowns. Others change throughout the year and were affected by the rise in remote working and closed shops.
During lockdown, our use of electricity dropped significantly across the UK, following weeks of high winds in January 2020. This meant the network had a surplus of supply met with a demand deficit which resulted in costs of nearly £50m to balance the network. Plus, suppliers were forced to sell off spare energy at a loss on the European market. One of the rare occasions where it may have been cheaper long term to leave our lights on.
The lockdown also affected the governments FiT and CfD levy costs. These are reviewed quarterly and significant changes in generation or demand of renewable energy have a knock-on effect on how much we pay in taxes to support the industry. But it’s not all bad news, lower emissions mean a healthier planet and a more sustainable future. Plus, we will end up paying less towards the climate change tax.