The cost of electricity has been fluctuating considerably in the last few years. From the highpoint in September 2018 wholesale prices had fallen by roughly 60% by 2020. During the lockdown they started to rise again. Despite the temporary drop energy bills have consistently gone up. The reason for this is a rise in non-commodity, or ‘third-party’, costs.
What are non-commodity costs?
Essentially the amount we pay for energy includes three different expenses. The first is the wholesale price of the actual amount of power we use (the commodity). Secondly, we have the cost of transmission and distribution across the network. And finally a variety of government levy and taxes. The energy companies pay these fees and pass the cost onto their customers.
In 2011 non-commodity costs accounted for about 36% of energy prices. In 2021 this has risen to 64% and is predicted to reach 70% to 80% over the next decade.
Here is our guide to the different types of non-commodity costs.
Transmission and distribution costs
Each supplier incurs expenses to run and maintain the power network. These vary from provider to provider and depend largely on the type of power plant. For example, solar and wind generators are less consistent than gas or nuclear power. With a move towards renewable energy, the cost of balancing the system is likely to increase. The main expenses are:
Government levy and taxes
These taxes fund various government initiatives and green energy programs.
Covid-19 and the energy market
Some non-commodity costs are set at the beginning of each year. Others are subject to change throughout the year. In simple terms, the non-commodity charge is equal to the cost of providing energy to the nation divided by how much we use. The more we need to use, the lower the cost of non-commodity and the higher the wholesale price.
During lockdown, our use of electricity dropped significantly across the UK. Following weeks of high winds in January 2020, the network had a surplus of power and a far lower demand. This resulted in costs of nearly £50m to balance the network and sell off spare energy at a loss on the European market. This is one of the rare occasions where it would have been cheaper long term to leave our lights on.
The lockdown also affected the 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. It’s not all bad news though, lower emissions mean we will end up paying less towards the climate change tax.
Controlling your expenses
With the increases in non-commodity costs set to continue it is important to keep an eye on your bills. Proper monitoring and tracking monthly changes will ensure you aren’t overpaying. In our experience, nearly 20% of all utility bills include a mistake.
With such turbulence in the market, there is less control over the wholesale cost of electricity. What can be controlled is how we use energy. At EIC we can help you plan your usage around annual Triad periods. This can make a significant difference to your energy bills. Our daily traffic light warnings will help you avoid any unnecessary fluctuations and keep costs low. Our clients have saved on average £180,000 on TNUoS charges.
Whether you prefer the stability of a fixed price or the control of a flexible contract we can help. Setting up an energy contract can be a long process, especially if you want a good price. We have the experience to negotiate with your provider to make sure you are not paying more than you should be. Our service is tailored to your needs. To find out what we can do for your business get in touch today.