Non-commodity charges explained

The purpose of non-commodity charges is to cover the additional costs associated with energy consumption. Non-commodity charges sit alongside taxes and levies that contribute to the overall operational costs of the network. Navigating the purpose and dynamics of each non-commodity charge can be difficult, so we have put together this explainer guide which runs through the key details to help you understand this significant portion of your bill.

What is a non-commodity charge?

The non-commodity charges are set by the government and third parties, and currently account for approximately 52% and 16% of the final cost for electricity and gas respectively. The final delivered cost of electricity and gas is made up of a commodity element (purchased on the wholesale market) and several non-commodity elements. We have a degree of control when it comes to the commodity charges, by managing the timing of securing fixed contracts or the execution of a flexible trading strategy. These range from the cost of the electricity that is lost to heat in transmission, to redistributing the cost of the infrastructure to power the more remote parts of the UK.

To learn more about flexible trading strategies, read our in-depth guide for businesses here.

How are non-commodities charged?

The way in which non-commodity costs are calculated varies between consumption and the number of contracted days (i.e. p/kWh or p/day). Within this, the charges may be calculated on a consumption band basis or vary depending on region.

The Office of Gas and Electricity Markets (Ofgem) introduced the Targeted Charging Review (TCR) in 2022 for distribution charges and 2023 for transmission charges. Ofgem aimed to improve the methodology behind charges, as in the past larger energy users would predict and adjust consumption to pay less towards transmission, distribution and balancing.

The changes driven by TCR helped to make the allocation of charges fairer, meaning many businesses now pay for transmission and distribution charges based on their capacity for energy usage.

What are the specific non-commodity charges?

Non-commodity charges are more significant with electricity compared to gas. The three charges that contribute most to the overall cost are: Renewables Obligation (RO), Distribution Use of System (DUoS), Balancing Services Use of System (BSUoS).

The revenue collected from RO charges are used by suppliers to fund large scale renewables projects. As the scheme closed in 2017, long-term contracts for renewables may mean we don’t see related cost reductions for many years.

The DUoS charge covers the cost of maintaining and expanding the local electricity distribution networks. The specific rate incurred depends on either consumption (kWh) or capacity (kVA), as well as region, and recent changes mean charges are mostly collected in the standing charge.

BSUoS is associated with the costs of real-time balancing of the electricity grid. All users pay towards the costs of the national control room, frequency response, and paying generators to turn on or off to maintain the balance.

Gas non-commodity charges consist of Unidentified Gas (UIG), covering the cost of theft, profiling errors and meter insensitivities, National Transmission System (NTS) and Local Distribution Zone (LDZ).

How do non-commodity charges support the transition to Net Zero?

Beyond the Renewables Obligation which has already been mentioned, there are other non-commodity charges that address the green agenda. These include Contracts for Difference (CfD), Feed-in Tariff (FiT) and Climate Change Levy (CCL).

The CfD scheme offers revenue stability for renewable energy projects, removing one of the blockers for investment. Payments are made between the generator and Low Carbon Contracts Company to settle the difference between the market price and the pre-determined ‘strike price’. This has enabled 29.4GW of new low-carbon capacity by 2030, reducing reliance on carbon-intensive fuels.

From 2010 to 2019, the FiT scheme paid generators a fixed, above-market rate for electricity that was fed back into the grid. This scheme was designed to incentivise the development of renewable energy sources to accelerate the transition to clean energy.

CCL is a tax charged on energy usage and is designed to encourage efficient consumption. It was fixed at 0.43 p/kWh between 2001 and 2007, and since then it has risen in line with inflation. Click here to read our article on the Climate Change Levy.

Conclusion

To conclude, non-commodity charges play a crucial role in supporting the overall infrastructure of the energy network, alongside promoting renewable, low-carbon generation through RO, CfD, FiT and CCL. This landscape is constantly evolving with new regulations, often in support of the transition to Net Zero.

Our specialist team regularly shares any key developments in the non-commodity charges in our bi-annual Non-Commodity Report. We specialise in recommending and delivering the right energy risk management strategy for our clients. Please get in touch to find out how we can support you.