UK Electricity Non-Commodity Costs
Share on LinkedIn25 Jan 2021
In the UK, businesses have seen their overall electricity bill increase year-over-year for most of the past decade. One of the most frequent questions we receive is – how can my electricity bills rise when commodity prices are flat or decreasing? It is an excellent question worth a clear answer.
Over the last few years, non-commodity costs (costs other than the price of energy itself including, transmission and distribution costs, renewable obligations, balancing, feed-in-tariffs, climate levies, etc.) in the UK have increased significantly. The UK government imposed various taxes and levies on end consumers to fund ongoing projects and schemes that will increase electricity generation, especially from low carbon and renewable sources. For example, in 2016, the UK government introduced two new levies: the Capacity Mechanism and Contracts-for-Difference under the Energy Market Reform (EMR) policy. Back then, the ratio between non-commodity costs and commodity costs was 50 to 50. Now, the non-commodity charges far exceed commodity charges, making up approximately 65 percent of energy bills. The chart below captures specific types of non-commodity costs charged and the change in value over time.
In addition to the increases in non-commodity charges, the pandemic has also had an impact. The UK government imposed the first lockdown in late March 2020 amid the global COVID-19 pandemic's initial wave. Immediately, commercial and industrial demand for electricity dropped by 25 percent. Residential consumption rose due to a larger number of people working remotely. The residential increase was not enough to make up for the significant drop in commercial demand. Overall, the net electricity demand across the UK dropped significantly.
It is important to note that several non-commodity charges, such as the government's Renewables Obligation (RO) and Feed-in-Tariff (FiT) schemes, remain unchanged despite the recent change in overall demand. Consequently, these costs are required to be spread over lower demand volumes, meaning non-commodity costs per kWh increase for all consumers. In the initial months of 2021, the UK government has reimposed lockdown and restrictions. These additional waves of Covid-19 are likely to have further impact on electricity demand in the UK.
In the past, commercial and industrial consumers were able to maintain or reduce some of their non-commodity costs, such as transmission (TNUoS) charges, by reducing load during peak hours. Unfortunately, this might not be as easy anymore. In December 2019, Offices of Gas and Electricity Markets (Ofgem), the UK's government regulator, announced that under the Targeted Charging Review, charges for transmission and distribution (DUoS) would move away from avariable consumption/demand-based model to fixed band charges based on a supply's available capacity level. These changes will come into effect in 2022.
NUS Consulting Group closely tracks and analyzes each of the various non-commodity charges applied in different energy markets. We help our clients identify non-commodity cost reduction opportunities, understand regulatory changes, and model impacts on their total energy costs.
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