The UK energy market has facedsignificant changes in recent years, with non-commodity charges becoming anincreasingly large portion of both business and household energy bills.

While many consumers focus on the cost ofgas and electricity, these additional charges – covering infrastructure, gridmaintenance, environmental levies, and system balancing – could be contributingto over 60% of total energy costs.

In businesses, especially those inenergy-intensive industries, rising non-commodity charges are a cause forconcern – affecting operating costs and long-term financial planning. Fordomestic consumers, these charges contribute to rising household energy bills,adding further pressure amid cost-of-living concerns.

So why are non-commodity chargesincreasing, and what can businesses and households do to mitigate these costs?Let’s explore the key drivers, potential future changes, and strategies formanaging your energy expenses.

What Are Non-Commodity Charges?

While the wholesale cost of electricityand gas will fluctuate depending on the market demand and supply chain,non-commodity charges are additional fees added by the government, regulators,and network operators to fund infrastructure, environmental incentives andimproving system stability – all essential parts of maintaining a reliable andsustainable system.

Key Components of Non-Commodity Charges:

NetworkCosts

●      These covertransporting electricity and gas from power stations and suppliers toend-users.

●      Charges areset by National Grid and Regional Distribution Network Operators (DNOs).

●      Costs areincreasing due to the need for grid upgrades and reinforcement to accommodatemore renewable energy sources.

SystemBalancing and Capacity Charges

●      The BalancingServices Use of System charge covers the cost of ensuring electricity supplyand demand are balanced in real time.

●      The CapacityMarket Charge helps ensure there is always enough electricity available,especially during peak demand periods.

Environmentaland Policy Levies

The UK government has introduced severallevies to support renewable energy projects, carbon reduction, and energyefficiency initiatives. These include:

●      Contracts forDifference (CfD) Levy – Funds subsidies for renewable energy generators toencourage low-carbon electricity production.

●      RenewablesObligation (RO) Levy – Supports large-scale renewable projects and ensureselectricity suppliers source a proportion of energy from renewables.

●      Feed-inTariff (FiT) Charge – Covers payments to households and businesses generatingtheir own renewable electricity.

●      ClimateChange Levy (CCL) – A tax on businesses to encourage energy efficiency andreduce emissions.

MarketRegulatory Costs

●      Chargesrelated to industry regulation, compliance, and consumer protection initiativesset by Ofgem and government bodies.

●      Includesfunding for programmes like the Energy Company Obligation (ECO), which providesenergy efficiency measures for households.

Why Are Non-Commodity Charges Increasing?

Several factors are pushing upnon-commodity charges, making it increasingly difficult for businesses andconsumers to manage energy costs effectively.

Rising Investment in Grid Infrastructure

The UK’s transition to a net-zero economyrequires significant investment in modernising the electricity grid. Theexisting network was built primarily for centralised fossil fuel powerstations, whereas the current energy system relies more on decentralised andintermittent renewable energy sources such as offshore wind and solar.

●      More than £50billion is expected to be invested in grid infrastructure over the next decadeto support the UK’s net-zero goals.

●      The expansionof the electric vehicle (EV) charging network and increased electrification ofheating (e.g., heat pumps) will place greater demand on grid capacity,requiring further upgrades.

●      Costs ofreinforcing transmission and distribution networks are passed on to consumersthrough higher non-commodity charges.

Increased Support for Renewable Energy and Carbon ReductionPolicies

The government’s commitment to phasingout fossil fuels and increasing renewable energy means that subsidy schemessuch as Contracts for Difference (CfD) and the Renewables Obligation (RO)continue to be funded through levies on energy bills.

●      In 2023, CfDcosts increased as more offshore wind and solar projects were brought online.

●      TheRenewables Obligation Levy has seen annual increases as suppliers are requiredto source a larger proportion of energy from renewables.

●      Businessesand high-energy users are particularly affected by the Climate Change Levy(CCL), which has been increasing year-on-year.

System Balancing Costs Due to Renewable Intermittency

As the UK moves towards wind and solarpower, balancing the grid has become more complex. Unlike gas-fired powerstations, which can be adjusted in real-time, wind and solar power generationdepends on weather conditions. This creates challenges for National Grid,requiring expensive balancing measures, such as:

●      Paying gaspower stations to provide backup capacity.

●      Increasingreliance on battery storage solutions to store excess renewable power.

●      Expandinginterconnectors to import/export electricity from Europe to stabilise supply.

All of these balancing efforts add tonon-commodity charges on consumer bills.

Energy Market Reforms and Changing Tariff Structures

The UK government is currentlyconsidering electricity market reform, including zonal pricing models whereelectricity costs vary by region. This could lead to further disparities innon-commodity charges, affecting businesses differently depending on location.

How Can Businesses and Households Reduce Non-Commodity Costs?

While non-commodity charges areunavoidable, there are strategies to help minimise their impact.

Improve Energy Efficiency

●      Investing inLED lighting, smart heating systems, and energy-efficient equipment cansignificantly lower overall consumption.

●      Conducting anenergy audit can help businesses identify waste and implement cost-savingmeasures.

On-Site Renewable Generation

●      Businessescan install solar panels or combined heat and power (CHP) systems to reducereliance on the grid.

●      Batterystorage allows businesses to store excess power and use it when electricityprices are high.

Demand Side Response (DSR) and Load Shifting

●      Adjustingenergy use to avoid peak times can reduce network and system balancing charges.

●      Automateddemand response systems help businesses optimise consumption based on marketconditions.

Regular Tariff Reviews and Energy Procurement Strategies

●      Businessesshould work with energy consultants to negotiate contracts that factor in bothcommodity and non-commodity costs.

●      Reviewingfixed vs. flexible energy contracts can help find the best pricing model.

Final Thoughts:

With non-commodity charges continuing torise, businesses and households need to take proactive steps to manage theirenergy costs effectively.

By implementing energy efficiencymeasures, investing in renewables, and adopting smart procurement strategies,consumers can mitigate the impact of rising charges while contributing to theUK’s net-zero transition.

Looking ahead, businesses should stayinformed about market reforms, engage with energy specialists, and exploreinnovative energy-saving solutions to remain competitive in a changing energylandscape.

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