Your business electricity bill is comprised of two parts, energy as a commodity and another significant portion known as ‘non-commodity costs’. Non-commodity costs or ‘third party costs’, as the name suggests, are additional costs such as network charges, distribution, and transportation costs, as well as environmental levies and taxes set by the government to fund our future low carbon grid.
Business consumers tend to hear less about non-commodity costs, but they make up approximately 70% of your total billed energy rate. As the UK drives towards decarbonisation and our ambitious goal of Net Zero 2050, many of these schemes have fixed costs, so if consumption falls, for example due to COVID lockdowns or energy efficiency drivers, the amount we all pay per unit increases.
Will the rise in inflation impact non-commodity costs?
Non-commodity costs are indexed to inflation, to ensure network owner or generators’ income increases to reflect any increases in inflation.
The recent increases in Feed in Tariff (FiT), Renewable Obligation (RO) and Contracts for Difference for 2022/23 reflect a higher rate of inflation than historic forecasts.
The Feed in Tariff prices paid to generators are adjusted by Ofgem each year using the (Retail Price Index) RPI rate published in the January before the start of the financial year in April. This was 7.5% in 2022 and is forecast to be even higher in January 2023.
The Renewable Obligation Buy Out Price for supplier payments and Renewables Obligation Certificates (ROCs) paid to generators are determined each year using the calendar average of RPI, therefore the 2022 outturn for RPI is likely to further increase scheme costs in 2023/24.
Contracts for Difference (CfD Obligation) uses a complex CPI adjustment that also factors in BSUoS (Balancing Services Use of System charges) rates and network losses, which is applied to each generators’ agreed payment prices each year – resulting in an increase in expected prices for 2022/23.
Network Costs – Electricity and gas network owners use a blend of CPiH (CPI + Housing costs) and RPI to adjust their yearly allowed revenues collections. These were originally set at 2018/19 prices; and these network revenues and rates will rise and fall depending on this inflation input.
Alongside a rising and fluctuating commodity market, the increases in non-commodity costs create an extremely challenging environment for suppliers and customers alike, which means that in the short-term we are all going to have to pay more.
Unfortunately, this increase looks set to continue and this is certainly the most volatile market in history.
how can we help?
Every business is experiencing an increase in energy costs right now however, we can help your business navigate the energy crisis and understand the market to provide a long term budget secured strategy.
Book your Utility Health Check and speak with an energy expert today: