Commodity and Non-Commodity Costs
Your electricity bills are made up of two elements: commodity and non-commodity costs. Prices have trended upwards over the past two years, driven by different factors at different times. Understanding how your bill is divided and calculated is important to give yourself an overview of how future legislative and energy sector changes will impact on your energy costs.
Commodity costs are the simplest to define, referring to the direct costs involved in the generation of the electricity you use. This covers an increasingly broad range of technologies, including the cost to build, operate, and fuel fossil fuel and nuclear generation as well as the installation and maintenance costs of renewable generation.
Non-commodity costs are those that originate from a third party, such as the Government, which are then passed on to your energy supplier and added to the bills of end users. They are also referred to as pass through charges for this reason.
Non-commodity costs make up an increasingly large proportion of the average electricity bill, currently around 60% of the total cost of the electricity your site consumes. Broadly, they fall in three different categories:
- Renewable subsidies: sometimes termed green levies, government subsidy schemes to support clean generation such as the Renewable Obligation (RO), Feed-In Tariff (FiT) and Contracts for Difference (CfD) have been introduced over the last decade. The cost of these subsidies is covered by additional charges on both business and domestic electricity. While the RO and FiT have since closed, the cost of these projects still makes up a substantial proportion of non-commodity costs.
- Use of system costs: These are the costs incurred by the transmission operator (National Grid) and Distribution Network Operators (DNO) in operating and maintaining the networks used to deliver electricity to your site. These costs are covered by the Transmission Network Use of System (TNUoS) charge and Distribution Use of System (DUoS) charges respectively. A third charge, BSUoS, is used to cover the cost to National Grid of balancing supply and demand.
- Taxes and Levies: This is a mixture of additional levies and costs added to energy bills to cover various additional costs. These include the Climate Change Levy, an environmental tax charged on business energy use, and the Capacity Market, used to ensure standby generation is available to meet spikes in demand during periods of low generation. It also covers VAT, other taxes and third party costs.