Non-commodity costs: the cost of inaction
Non-commodity energy costs are rising and are forecast to continue on their current trajectory well into the next decade. But before we go into the details of what’s rising and why, it is essential to understand the definition of non-commodity costs in relation to energy. From the perspective of the energy user, the non-commodity costs make up the ‘other’ charges on the energy bill. These charges cover two key areas, the network that delivers our energy, and the policy that supports the government in developing a green economy. The key network costs comprise of: TNUoS and DUoS, which are the national and local level costs of using the grid, the CCL (Climate Change levy), CfD (Contract for Difference), FiT (Feed in Tarrif), and the CM (Capacity Market) are all there to ensure abundant renewable generation and a balanced system with enough secure generation. As the grid smartens up, more complex generation is enabled, and the need for renewable energy continues to increase, these costs will rise.
The future of the energy sector is not one that relies on conventional carbon based generation to very simply turn up and down based on demand, but one that will see negative prices for wholesale energy and generation in many different forms. Consumers and producers of energy will merge into prosumers as concepts such as electric car batteries stabilising local grids when renewable generation is low become mainstream. Complexity more often than not equals costs, and as we transition to the new energy smart grid of the future, we must pay our way to reach that goal.
So how do the next 5 years look for businesses using a lot of energy?
Take a business that consumes 1 GWh (1000 MWh) of energy per year. They have an approximate total spend of £130,000, comprised of both wholesale energy costs and non-commodity costs. Let’s break that down further. Year on year until 2024, the wholesale price of energy is forecast to remain at just under £50,000 of the bill or 38% of the total. By 2024, the wholesale cost comprises of just 28% of the total bill. That means the remaining 72% of the bill will be non-commodity costs or £125,000. As the UK infrastructure adapts to a more decentralised and diversified energy supply, and local networks upgrade to accommodate a smarter grid, the costs of network and distribution charges will increase to facilitate this change. Going back a couple of years from 2024 to 2022, we will see the cost of supporting renewable generation increase as more of it comes on to the grid. The Contracts for Difference, which gives greater stability of revenue to renewable generators in a volatile wholesale market, will see an increase as more renewable generation emerges (likely to be onshore wind). Other green policies from the government will have finished by 2022, with the Renewable Obligation for example no longer applicable as of last year (2017).
Going back a fair few years now to 2012, wholesale energy costs comprised 72% of the energy bill. That will turn on its head in the coming decade. The cost of inaction for commercial and industrial businesses will be in the hundreds of thousands. Therefore businesses need to act quickly in order to adapt to the rising costs of the energy market. There are ample ways to counter the upward trend, many of which are very low cost and easy to implement. Staff behavioural change can save companies tens of thousands of pounds per annum by incentivising the right behaviour patterns. Retrofitting office space, warehouses, and factory floors can reduce net energy spend by as much as 10% on average per annum. On site generation, demand management and demand side response can then optimise energy consumption for individual sites. By cutting winter peak energy usage and investing in on site generation, businesses can avoid huge network costs while maintaining a stable supply.
Get in touch today to learn how you can reduce your overall energy spend and optimise your energy usage at email@example.com.