Non-Commodity Costs Forecast for 2021: Part 1 – Introduction

by | Oct 28, 2020

Many of our clients are interested in a non-commodity costs forecast for 2021, especially since they are constantly changing.

Also known as third party, industry or non-energy charges, non-commodity costs (NCCs) are the charges that are not directly related to the cost of wholesale energy. NCCs are set by third parties, out of the control of the energy supplier

Today, non-commodity costs make up an ever-increasing share of the total electricity price. In this blog series, we will provide a Non-Commodity Costs forecast for 2021 and help you navigate the increasingly complex NCC landscape.

Non-commodity costs are increasing 

When it comes to a forecast for non-commodity costs in 2021, we know that NCCs are on an upward trend. In 2009, electricity invoices were made up of 71% electricity charges and 29% non-commodity charges. This has changed drastically over the last 10+ years, with NCCs now making up 61% of the average customer’s invoice.   

Put in ‘money terms’, a site with an annual consumption of 1,000,000 kWh is paying approximately £21,000 more per year with the increases and introduction of new non-commodity charges. 

Why are non-commodity costs increasing?

Much of this change supports the UK’s carbon reduction goals and provides incentives for further investment in renewable energy generation, as the phase-out of carbon polluters such as coal plants will be decommissioned by 2025. 

A list of non-commodity costs incurred

Network charges and security of supply costs

These are the NCC associated with delivering electricity from the source of generation to the end-user via the electricity Transmission and Distribution networks. 

Security of supply costs ensure the electricity network is safely balanced and stable (BSUoS) and guarantee supply (Capacity Market).

  • Transmission Use of System (TNUoS) 
    • Half-hourly (HH) costs
    • Non-half hourly (NHH) 
    • Embedded export costs
  • Distribution Use of System (DUoS)
  • Balancing Services Use of System (BSUoS) 
  • Assistance for Areas with High Electricity Costs (AAHEDC)
  • Capacity Market (CM Obligation)

Environmental charges 

Environmental NCCs are associated with government environmental policies. They incentivise investment into low carbon, renewable generation and play a pivotal role in decarbonising UK electricity

  • Feed-in Tariff (FiT)
  • Renewable Obligation (RO)
  • Contracts for Difference (CfD)

How NCCs are covered in your electricity bill 

At the time of contracting, energy suppliers purchase electricity from the wholesale market to cover the amount of electricity required for the contract. They aggregate other industry charges (non-commodity costs) onto one invoice for customers to pay. This invoice is made up of a p/kWh consumption charge and a standing charge.

Many of the new NCC charges can be difficult for suppliers to predict. That’s why they include premiums on their contracts to allow for unexpected changes. More recently, suppliers are offering ‘standard contracts’, which allows the suppliers to increase their prices during the contract term where their costs increase unexpectedly.

Recently, the Feed-in Tariff (FiT) has become a good example of the difficulties suppliers face in estimating NCC charges. The Feed-in Tariff applies to the small-scale generation of electricity using eligible renewable technologies. To encourage the development of these technologies, FiTs pay the generator a certain amount even for energy consumed by the generator.

Customers who put solar panels on their properties between 2010 and 2017 are entitled to receive FiT payments. During the COVID-19 period, there was a lot of sunshine, and the FiT’s fund was expected to pay out more than expected.   

However, the money collected for FiTs from suppliers was much lower than expected as energy demand in the UK dipped significantly. The same amount of electricity was produced, but less kWh were billed; therefore, less revenue was collected to pay the generators. The amount collected (p/kWh) from each customer is below what is paid out. For this reason, suppliers will incur high FiT’s charges which they may pass through to customers.  

The calculation is as follows: 

FiT Calculation

Non-Commodity Costs Forecast for 2021: Part 2 – Targeted Charging Review 

Look out for the next blog post in the series; we will take a closer look at the Targeted Charging Review (TCR) and the way that regulatory changes will impact customer contracts.

For more information and assistance, contact your Smarter Business account manager.

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