Over recent years, energy prices in the UK have significantly increased, leaving businesses and consumers alike grappling with higher costs. While many attribute this rise to wholesale energy costs, non-commodity costs have played a large role in pushing up energy bills.
According to a report from npower, non-commodity charges make up over 60% of an energy bill for many large businesses, which reflects the rising costs related to delivering energy, maintaining grid infrastructure, supporting renewable energy and ensuring supply security.
In this guide, we’ll break down non-commodity costs, examine their impact on energy prices and explore how businesses can navigate these rising charges.
What are non-commodity costs?
Non-commodity costs refer to all the expenses on an energy bill that are unrelated to the wholesale price of electricity or gas. These charges are applied to cover a range of infrastructure, policy and regulatory activities including:
- Transmission and Distribution Charges: The cost of transporting electricity from power stations to homes and businesses across the grid.
- Balancing Services: Fees to maintain the stability and reliability of the grid.
- Environmental Levies: Charges associated with supporting renewable energy and decarbonisation efforts.
- Capacity Market Charges: Ensuring there is enough generation capacity to meet peak demand.
- Policy Costs: Government initiatives designed to encourage energy efficiency and reduce carbon emissions.
These costs are built into energy bills, impacting businesses of all sizes and are forecasted to increase in the coming years as the UK moves towards net-zero targets.
The evolution of the UK electricity grid
The foundation of the UK’s energy infrastructure dates back to the 1930s, when the National Grid was first established to transport power from large, centralised fossil-fuel-based power stations. For decades, the grid operated predictably, delivering electricity generated from coal, gas and oil to homes and businesses. Transmission and distribution charges were low because the grid’s structure was relatively simple and the distances electricity had to travel were short.
Around the year 2000, the landscape began to shift. Decarbonisation efforts, driven by international climate goals, saw a push towards renewable energy generation, particularly wind and solar power. This transformation marked the beginning of substantial changes to the way the UK’s electricity system operated, as well as the associated costs.
How green energy is impacting costs
Decarbonisation has been a large driver of rising non-commodity costs over the past two decades, and it will continue to be so for the foreseeable future. Transitioning away from fossil fuels to renewable energy requires significant investment in new infrastructure, such as offshore wind farms and solar arrays, as well as upgrades to the national grid to transport power from these remote locations.
Wind generation, for example, was very expensive for developers during the early 2000s. The government stepped in to offer subsidies to stimulate investment, first through the Renewables Obligation (RO) in 2002. This was followed by the Feed-in-Tariff (FiT) in 2010, supporting small-scale renewable generation like rooftop solar and then Contract for Difference (CfD) in 2014. Although the RO was replaced by the CfD for new generation from 2017, it continues to pay out for existing projects and will do so until 2037.
Despite the substantial costs, these subsidies have successfully driven renewable energy adoption. Today, nearly 30% of the UK’s electricity is generated from wind with solar and biomass contributing another 10%. As the UK strives for net zero, non-commodity costs will continue to rise, not only to support renewable energy but also to fund the necessary infrastructure upgrades.
Related Reading: Harvesting sunshine: How solar panels can transform your business energy usage
Transmission and distribution costs
One of the less visible but still crucial factors in increasing non-commodity costs is the growing need for grid infrastructure upgrades. Renewable energy, particularly large-scale wind farms, is often located in remote areas, such as the Scottish coastline or offshore. This means that electricity must travel longer distances to reach homes and businesses, necessitating major investments in the transmission network.
National Grid ESO estimates that an additional £58 million in investment will be required to reinforce the grid to meet net-zero goals. The grid needs to be able to handle increasing volumes of intermittent renewable energy while maintaining supply reliability, which adds complexity and cost.
Balancing the grid
As the energy system becomes more reliant on renewable sources like wind and solar, balancing the grid (ensuring a consistent supply of electricity) has become more challenging. Renewable generation is extremely variable, the wind doesn’t always blow and the sun doesn’t always shine. Balancing services, such as paying wind farms to turn off when supply exceeds demand or activating backup gas plants when needed are critical, but costly.
Balancing Services Use of System (BSUoS) charges, which cover the cost of these services, have risen significantly over the past decade. In 2022 and 2023, the UK spent approximately £7 billion on balancing costs, much of which was due to paying wind farms to restrict generation during periods of excess supply and turning on standby gas plants when needed. As renewable capacity continues to grow, these costs will too.
The impact of the Ukraine conflict
In addition to decarbonisation efforts, global events have also driven up energy prices and non-commodity costs. One notable example is the impact of Russia’s invasion of Ukraine on global gas markets. Although the UK sources only a small portion of its gas from Russia (around 4%), the invasion caused significant disruptions in European gas supplies, leading to skyrocketing gas prices around the globe.
This surge in gas prices had a knock-on effect on electricity prices, as gas-fired power stations still play a major role in the UK’s energy supply. The volatility in global energy markets due to geopolitical events highlights the importance of continuing the transition to renewable energy and reducing reliance on fossil fuels.
Related Reading: How the Russo-Ukrainian war is affecting energy costs
Managing rising non-commodity costs
As the UK continues its necessary journey to net zero, non-commodity costs will remain a major factor in energy price increases. While decarbonisation is essential for tackling climate change, it comes at a cost, and businesses are feeling the pinch. Transmission and distribution upgrades, renewable subsidies, balancing services and policy costs all contribute to the rising charges that make up over half of most energy bills.
For businesses, understanding and managing these non-commodity costs is crucial to controlling energy expenses. Solutions like energy efficient measures, on-site renewable generation and careful monitoring of energy consumption can help mitigate some of the financial impacts.
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