Though wholesale energy prices experienced a steady four-year decline between 2012 and 2016, things took a sharp turn last year, with Brexit – amongst other factors – one of the major instigators of market volatility and cost increases.
However, the rise in wholesale prices is not the only reason as to why many UK homes and businesses have seen their energy bills balloon in recent months. That is because non-energy costs, or non-commodity charges as they are likewise known, have also been escalating – and at an unprecedented rate too.
In 2014, the price of wholesale power accounted for half of our energy bills, but this share has fallen by 20% since. At the same time, non-energy costs have risen by more than 20%, and now contribute a total of approximately 60% to an end-user’s bill – a larger proportion than ever before.
So what exactly are non-energy costs? And more to the point, why are they on such a steep curve upwards?
Non-energy costs are obligatory charges, levies and taxes set by the government and cover the price of running the UK’s gas and electricity networks. These costs are effectively the components of a bill which are beyond the control of the energy supplier (resulting in them additionally being referred to as third-party charges), and can generally be split into two bundles:
Network costs – the delivery of power to meters and maintenance of the power grid, the prices of which are determined by charges such as the Distribution Use of System (DUoS), Transmission Use of System (TNUoS) and Balancing Use of System (BSUoS).
Policy costs – Government policies aimed at encouraging decarbonisation and renewable energy development. These include charges such as the Climate Change Levy (CCL), as well as subsidy schemes including Renewables Obligation (RO), Feed-in-tariff (FiT) and Contracts for Difference (CfD).
The reason for the rise in non-energy costs is largely down to the second of these groups. With the government under pressure to reduce carbon emissions and secure a future for the country driven by more sustainable energy, the UK’s power generation picture and how the national grid operates to accommodate these newer, greener sources is under rapid transformation.
For example, in 2011 there were only a few hundred registered generation sites which were mainly made up from traditional energy sources, such as large power plants. Fast-forward six years and there are now well over half-a-million registered generation sites – an increase mostly attributed to the greater availability and affordability of green technology, such as solar panels, which have been installed by homes and businesses and produce energy on a much smaller scale.
How then has this resulted in prices being pushed up? And what does that mean for future energy bills?
Put simply, the majority of these small generators get support from the various government subsidy schemes, such as RO, FiT or CfD – the combined cost of which is set to double between 2015 and 2020. As a knock-on effect, the ever-increasing number of new sites coming on to the grid is also driving up network costs, causing the system to require more maintenance and upgrades.
Unfortunately for end consumers, non-energy costs are set to rise year-on-year for the foreseeable future as investment in low-carbon generation continues. Indeed, industry estimates suggest that non-energy costs could make up 70% of the total bill by 2020, with non-domestic customers expected to be hit by higher price hikes than domestic customers.
How can we help?
With non-energy costs continuously changing and notoriously hard to predict, they need to be constantly monitored and analysed to ensure consumers can accurately budget for their future bills. Our latest market report, available to download here, breaks down each component that contributes to your bill, such as transmission and distribution, levy controls, and other industry and environmental costs, and provides a forecasted cost for 2018, a description of the charge, and advice what to do to counter some of these costs.
Need help budgeting for the rise in energy costs?
If you have a question about this blog or want advice on getting the best energy contract for your business, get in touch. For more information on our energy procurement services, do not hesitate to contact one of our team on 02920 739 540 or email us and we'll call you back.