Understanding Non-Commodity Costs

All businesses will have to pay non-commodity costs on their energy bills, but what do these costs involve? And how much should you expect to pay? Our guide takes you through a breakdown of all the non-commodity costs you need to know about and how they affect your business. 

Non-commodity costs, also known as ‘third party costs’ are compulsory charges added to your energy bill to cover the cost of delivering energy to consumers. This includes paying for energy generation and transportation infrastructure and government-imposed taxes and levies designed to support renewable energy and carbon reduction.  

Commodity costs refer to the charges you pay for the actual energy you use, which is based on your level of consumption. On your energy bill, the wholesale costs are the only charges classed as commodity charges, whereas the non-commodity charges are the ‘non-energy’ portion of your bill.  

Non-commodity costs help pay for essential works such as operation, maintenance and regulation of utility services. They help ensure the reliability of vital infrastructure, that administrative processes are handled correctly and efficiently, and all regulatory requirements are met. Without these charges, it would not be possible to sustain the complex network needed to deliver energy and related services to consumers.   

As well as ensuring the smooth and sustainable operation of the energy system and funding vital maintenance of electricity and gas networks, non-commodity costs also help support various eco-friendly initiatives such as the development of renewable infrastructure.  

Wholesale costs will make up around one third of your energy bill. This refers to the money you pay for the energy you use, with the remaining costs being non-commodity costs such as government taxes and Levies.  

System Charges: 

• Transmission Network Use of Systems (TNUoS) – covers the cost of installing and maintaining transmission systems in England, Wales, Scotland and offshore areas.  
• Distribution Use of System (DUoS) – these charges support the maintenance, development and operation of the UK’s electricity distribution networks, including the cost of supplying your premises with electricity from the national grid. 
• Balancing Services Use of System (BSUoS) – these are daily charges paid by suppliers and generators based on the energy they take from, or supply to, the National Grid in each half-hour Settlement Period. 

Government Levies 

• Carbon Reduction Commitment – this is a mandatory scheme aiming to reduce the UK’s carbon emissions by 80% by 2050. 
• Climate Change Levy (CCL) – another scheme aiming to reduce emissions; the amount of CCL you pay will depend on how much energy you use, so the less energy an organisation uses, the less CCL they have to pay. 
• Renewables Obligation (RO) – this charge was introduced in 2002 to encourage large-scale renewable generation with the original aim of having 15% of all energy generated from renewable sources by 2020.  
• Feed in Tariff (FiT) – A subsidy scheme introduced in 2010 to help support small scale renewable generation and the uptake of renewable energy. 
• Feed-in-Tariff Contracts for Difference (FiTCfD) –  CfD generators have a contract with the Low Carbon Contract Company (LCCC) which guarantees them a fixed price for their exported electricity. 

It is likely that non-commodity costs will increase in the future as the country draws closer to its target net zero date and we continue to gather funds for renewable projects. These costs will continue to rise as we rely more heavily on renewable generation in coming years. 

Whilst some of these costs are unavoidable, others such as the CCL can vary depending on your energy usage and it is important to understand how and why your non-commodity costs are changing so your business can prepare and adapt if necessary to avoid excessive charges.  

The main way non-commodity costs will affect your business is by increasing the amount you will pay on your energy bills, accounting for up to 60% of electricity bill costs and 40% of gas bill costs. 

Some of these non-commodity costs, such as the Climate Change Levy can be influenced by the amount of energy you use and how energy efficient your business is.  

If you’re concerned about non-commodity charges and want to avoid overpaying, the following cost management strategies may help you: 

• Get a fixed rate contract – although this won’t change your non-commodity costs, you will pay a fixed price for your energy, so there are no additional surprises  

• Conduct an energy audit – this will help you get a greater understanding of your energy usage so you can identify areas where you can make adjustments and reduce overall costs 
• Get a smart meter – this will not only ensure that you are not being billed on estimates, but you will also be able to save time with automatic meter readings and understand your energy use in real time 

To find out more about how the UK energy industry works, check out our guide. 

For more help understanding all things business energy related, check out our energy guides!