Rising non-commodity costs – A challenge but also an opportunity

A range of different energy bill costs are rising in January as detailed by Ofgem this month.

There was a time when the rising wholesale cost of gas and electricity was the greatest challenge in buying energy – back in 2012, the commodity cost of electricity made up around 75% of commercial users’ energy bills. But times have changed. Non-commodity costs have been rising steadily and currently account for around half of your energy bill. And with further rises coming into play in early 2018, now is the time to make sure you have a full and clear picture of your energy consumption and costs.

What are non-commodity costs?

These are compulsory costs that relate to the delivery of electricity to a customer, but aren’t part of the price of the energy itself.  Some charges cover the various costs associated with the delivery of energy – so network costs, balancing the grid and the delivery of electricity to the meter. Others are policy costs, introduced to support government environmental obligations and subsidize energy efficiency schemes. The main non-commodity costs include Renewables Obligation, Feed in Tariff, Transmission Use of System, Distribution Use of System, Balancing Use of System, Contracts for Difference and Capacity Market charges.

What’s changing?

2018 will see a range of changes in non-commodity costs – this will result in total increases of around £18 per MWhr, or 20% of billed energy. Here are some of the key changes –

Renewables Obligation – Shift from compensation to exemption Designed to support large-scale renewable electricity generation and protect jobs and investment in UK industries, the renewables obligation exemption for Energy Intensive Industries (EIIs) will take effect from 1 January 2018, subject to parliamentary approval. EIIs are currently refunded for up to 85% of their eligible electricity, funded through general taxation. Under the new approach, they will be exempt from the indirect costs of the Renewables Obligation scheme and these will be recouped from other energy consumers.

So, while EIIs will benefit, other consumers are set to see their energy costs increase – according to Ofgem’s own impact assessment, non-EII heavy energy users will now see an annual increase of between £23,400 and £107,400 from 1st Jan 2018.

Transmission Network Use of System (TNUoS) charges will rise by around £4 per MWhr and will move away from “Triad” based charging over the next three years.

DCP 288 Distribution Use of System charges will increase for many 11kV and 33kV connected customers when DCP 288 comes into effect in April 2018. Click here to read more. (link to June blog)

Capacity Market charges will rise by up to £7 based on peak-period usage between December 2017 and February 2018 (just as the changes to TNUOS reduces the peak-period focus).

RO and FiT contributions will rise by around £3 per MWhr 6%.

Line loss charging will also change – with losses charged to customers in Southern and Eastern England and Wales due to increase by between £4 and £8 per MWhr from April 2018.

And The Good News

As the differential between “red zone” and other periods is being deliberately reduced, industrial and commercial users have less room than before to avoid grid charges.  But there are a number of favourable trends at play that will help to negate some of the impact of rising costs. Industrial and commercial consumers are managing their energy use in ever more innovative ways; increasingly turning to technology that allows them to manage the timing of their consumption and avoid high demand periods.

Energy Efficiency is firmly on the agenda – as charges increase, the case for investment in projects which may have previously failed a hurdle rate test will improve.

Move to Flexible Contracting With wholesale energy volatility increasing – as outlined in the recent National Grid Future Energy Scenarios – the case for moving to flexible contracting is improving, allowing users to avoid high cost periods and benefit fully from lower cost periods.

Grid Balancing – the value of services to National Grid such as Dynamic Frequency Response is increasing.

Self-Generation and Storage on the rise – industrial and commercial consumers are increasingly looking to off-grid, onsite renewable energy generation or batteries to power their operations and avoid peak demand charges. More than 2 gigawatts of onsite renewable energy were installed or financed at commercial and industrial premises in 2016 in the US alone. And this trend looks set to continue.

Be Prepared – Know Your Energy Costs

So non-commodity charges are set to continue to rise and they are increasingly complex. It has never been more important to have a complete picture of your energy costs.

We are committed to developing tools to support commercial energy users’ needs. Our unique platform is able to present fully accurate, real-time cost-of-energy at site and sub-site level. We are also creating tools to help ensure that flexible contracts are accurately and transparently priced. What’s more, the detail of our fully-costed energy consumption data makes the development and post-implementation tracking of investment cases far simpler and more accurate.

We can help you take control of your non-commodity costs – to find out more, contact Richard Lewin