Why Non-Commodity Charges are Increasing

What are commodity and non-commodity charges?

Your energy bills contain two main components, commodity, and non-commodity charges. These charges refer to the direct usage of energy and the costs associated with the delivery and management of energy.

Commodity charges refer to the costs directly associated with the consumption of the physical energy commodity itself, such as electricity or gas.

These charges are based on the actual amount of energy consumed and are influenced by market prices and the specific energy rate agreed upon in a customer's tariff.

Commodity charges fluctuate with market conditions and are a central component of an energy bill.

Non-commodity charges refer to the costs associated with the delivery and management of energy, which are not directly related to the physical commodity itself.

These charges include network charges for the transmission and distribution of energy, along with other costs such as system balancing, environmental levies, and operational costs.

Why are non-commodity costs included in your energy bills?

Non-commodity charges are included in energy bills to cover a range of essential services and infrastructure costs beyond the simple purchase of the energy itself.

These charges encompass various aspects:

• Network Costs: These are the costs for the maintenance and operation of the electricity and gas grids, ensuring that energy can be transmitted from power stations to homes and businesses efficiently and reliably.
• System Balancing: This includes the costs involved in ensuring that the supply of energy matches the demand at all times, thereby maintaining the stability and reliability of the energy system.
• Environmental Levies: These charges are related to government policies and initiatives to promote renewable energy sources, reduce carbon emissions, and achieve other environmental goals. They fund various schemes and incentives that support these objectives.
• Operational Costs: These are the costs associated with the administration of the energy supply, such as metering, billing, and customer service.
• Regulatory Costs: These cover the expenses related to compliance with various industry regulations, including safety standards, market operations, and consumer protections.

Non-commodity charges are necessary to ensure that the entire energy system operates smoothly, sustainably, and securely. They also reflect the broader objectives of energy policy, such as environmental sustainability and system reliability.

These charges can make up a significant portion of an energy bill, and they are subject to change due to factors like infrastructure investments, regulatory changes, and shifts in government policy.

What energy subsidies and schemes will be affected?

Nuclear-Regulated Asset Base (RAB)

Increasing by £0.50 per MWh from April 2024 - This increase will support investment in nuclear assets.

The nuclear-regulated asset base model is a regulatory framework used to finance large infrastructure projects, particularly in the nuclear energy sector.

In this model, a regulator allows a company to recover its investment costs and earn a regulated return through charges to consumers.

This method can lower the financing cost of building new nuclear power plants, as it provides more certainty over revenue streams.

The RAB model has been considered in various countries, including the UK, to support the development of new nuclear capacity.

Hydrogen Levy Scheme

Increasing £0.60 per MWh from April 2025 - These increases will help encourage green hydrogen energy production.

This scheme is likely related to the funding and development of hydrogen energy infrastructure. Hydrogen, particularly green hydrogen produced using renewable energy, is seen as a key component in the transition to a low-carbon economy.

A Hydrogen Levy Scheme would typically involve levies or taxes either on carbon-emitting industries or general energy usage, with the proceeds used to subsidise the production or distribution of hydrogen.

Such schemes aim to incentivise the use of hydrogen, especially in sectors hard to decarbonise like heavy industry and transportation.

Energy-Intensive Industry Subsidy

Increasing by £1.00 per MWh from April 2025 - Increases will help subsidies the expense that energy-intensive industries pay for power to enable them to remain competitive on the international stage.

This refers to government subsidies provided to industries that consume large amounts of energy, such as steel, cement, and chemical manufacturing.

These subsidies can take various forms, including direct financial support, tax incentives, or reduced energy prices.

The aim is often to help these industries transition to more energy-efficient practices or to mitigate the impact of environmental policies (like carbon pricing) that could significantly increase their operating costs.

However, such subsidies can be controversial, especially if they are seen as supporting industries that are major contributors to greenhouse gas emissions.

Carbon Capture Energy Subsidy

Expected Increase by £1.00 per MWh from the late 2020s - These increases will help implement carbon capture technology.

Carbon capture and storage (CCS) involves capturing carbon dioxide emissions from sources like power plants or industrial processes, and then transporting it to a storage site, often underground, to prevent its release into the atmosphere.

Subsidies for carbon capture are financial incentives provided by governments to encourage the development and adoption of CCS technologies. These subsidies can include tax credits, grants, or favourable regulatory treatment.

The rationale is that CCS is essential for reducing emissions, particularly in industries where other means of decarbonisation are not viable.

Why are the charges increasing from April 2024?

Non-commodity charges may increase due to several reasons, these include:

1. Infrastructure Investments: Upgrades or expansions to the energy grid infrastructure require significant investment. These costs are often passed on to consumers in the form of higher non-commodity charges.
2. Regulatory Changes: New regulations or changes in existing policies, particularly those focused on safety, environmental protection, or market operation, can lead to increased costs for compliance, which are then reflected in these charges.
3. Energy Demand Fluctuations: Higher energy demand in the energy markets can lead to increased costs in system balancing and network maintenance, as the infrastructure needs to operate at higher capacities and may require more frequent maintenance or upgrades.
4. Environmental Initiatives: Government-led environmental and sustainability initiatives, such as incentives for renewable/clean energy or carbon reduction targets, often involve additional costs that are funded through these charges.
5. Technological Advancements: The integration of new technologies into the energy system, like smart grids or renewable energy sources, can entail initial high costs.
6. Security and Resilience Improvements: Enhancing the security and resilience of the energy infrastructure against physical and cyber threats can require substantial investment.

One of the main expected reasons for the current increase in non-commodity charges is due to the rise in energy prices over the past few years, specifically from 2021 to the present.

However, with the aforementioned schemes and subsidies becoming much more popular and readily available, the infrastructure to run them will need investment.

This creates a supply and demand issue, resulting in the need for more funding for these operations and therefore an increase in non-commodity charges.

In summary, the rise in non-commodity charges from April 2024 reflects the need to upgrade the UK's energy infrastructure, comply with new regulations, and support environmental and technological initiatives.

These increases, seen in various schemes like the Nuclear-Regulated Asset Base and Hydrogen Levy Scheme, are essential for a sustainable energy future. While they may impact short-term costs, these investments are crucial for long-term energy resilience and sustainability.

Balancing these necessary expenses with fair energy pricing remains a key challenge for policymakers and the energy sector.