Decoding non-commodity costs for UK businesses
At npower Business Solutions, Stephen Evans, the Head of Industry Charges, delves into the intricate world of energy costs, shedding light on the often-overlooked non-commodity costs that are taking centre stage in the business energy landscape.
While much emphasis has been placed on mitigating the impact of fluctuating wholesale energy prices on businesses, the spotlight is now turning towards the additional elements that are creeping onto electricity invoices. These non-commodity costs are gradually claiming a larger portion of the overall expenses that businesses are required to shoulder.
The relentless surge in these costs has not gone unnoticed, with feedback from npower Business Solutions’ latest Business Energy Tracker underscoring the urgent need for the forthcoming government to prioritise simplifying and minimising non-commodity costs.
To demystify the realm of non-commodity costs and unravel their implications for businesses, it is crucial to understand what they entail and how they contribute to the escalating energy costs.
But before we delve into the nitty-gritty of non-commodity costs, it is crucial to glance back at the genesis of these charges and why they became integral to business energy bills.
The Imperative of Decarbonisation
In the year 2000, the UK embarked on a journey to diminish its reliance on fossil fuels. However, the shift towards increased renewable energy necessitated a substantial overhaul of the electricity system, subsequently entailing significant costs. Wind generation emerged as a prime alternative power source, albeit requiring costly infrastructural investments.
In response, subsidies were introduced to incentivise and propel investments, initially through the Renewables Obligation (RO) for large-scale wind farms and biomass, succeeded by the Feed-in Tariff for small-scale solar in 2010.
By 2014, the introduction of Contracts for Difference (CfD) supplanted the RO for all new generation, slated to continue disbursing subsidies for the subsequent 13 years.
Funding the Voyage to Net Zero
The reality is that the current cost conundrums confronting businesses are forging a path towards future sustainability. Undoubtedly, these subsidies have yielded fruits, with wind generation now meeting nearly 30% of the UK’s total electricity demand, complemented by escalating volumes of solar and biomass contributing approximately 10% of the electricity supply.
Several key drivers behind the mounting non-commodity costs, as we transition towards greener energy, include:
Building a robust and sustainable infrastructure capable of servicing future generations entails meticulous execution. Renewable generation sites are typically situated in disparate locations from the legacy power stations, which were not strategically positioned to harness wind or solar capacity. This shift from a few large generation sites to numerous smaller sites necessitates extensive transmission and distribution infrastructure.
Extending the reach of power: Offshore wind and solar farms are often remote from urban hubs, in stark contrast to traditional power stations located in proximity to towns for a shorter power transmission. Consequently, the transmission and distribution costs for green energy escalate to meet this unique challenge.
Striking a balance between supply and demand: Apart from funding green energy subsidies and transmission costs, electricity consumers contribute towards maintaining grid equilibrium and ensuring a secure power supply. As we transition from predictable fossil fuel supply to intermittent renewable generation, the task of grid balancing becomes increasingly intricate.
The cost of security of supply: With dwindling reliance on gas-fired power for round-the-clock generation, the expenses incurred by these power stations are not adequately covered by spot payments. Subsequently, they necessitate subsidies, facilitated by the new Capacity Market (CM) designed to uphold supply security during peak demand periods.
Investing today for a Sustainable Tomorrow
The bottom line is that non-commodity elements appended to electricity invoices have surged from around £100 per MWh in Q1 2023 to £112 in Q1 2024, with projections reaching approximately £132 by Q4 2025.
The silver lining is that once these foundational infrastructures are in place, these costs are poised to recede. The upfront investments are a testament to building a greener and more sustainable electricity system for forthcoming generations.
To delve deeper into the realm of non-commodity costs, refer to npower Business Solutions’ latest guide downloadable here.
This article was featured in the September 2024 edition of Energy Manager magazine. Stay updated by subscribing here.
