Non-energy costs are making up an increasing portion of the total costs and now account for as much as 50% of a typical energy bill. This report examines the breakdown of your bill.
There are three components to you electricity costs: Commodity, Policy and Network costs.
Commodity Costs vary everyday depending on the supply/demand balance, economic data, underlying fuel cost, sentiment and weather (etc.).
Policy and Network costs are termed “third party charges”, “non-energy” or “pass through charges” by suppliers as they stand outside the direct control of these companies. However, suppliers must ensure they set their consumer tariffs and prices accordingly to recover the policy and network costs.
Policy Costs – In order for the UK to reach its ambitious carbon target, as set by the EU, there are a number of policies in place aimed at reducing carbon intensive generation as well as charging levies to high energy consumers in order for the UK to meet its 2020 “Green” targets.
Network Costs – These charges are set by the operators of the regional distribution network and the national transmission system. They vary depending on where you are in relation to the generation sites.
In simple terms it is the cost of transporting electricity along its wires and cables to the end user’s meter. It also incorporates the costs for maintaining an aging network.
Why would the commodity cost rise?
The Large Combustion Plant Directive (LCPD) legislation was created to ensure that all ageing and high polluting fossil fuel power stations are closed. A directive set by the EU will force the closure of nearly all coal fire generation. Over 8GW of capacity will be taken offline by 2020 with only 2GW replacing it.
There are also further expected closures of power plants due to poor market conditions, namely gas fired generation. Earlier this year we have seen Centrica state that it plans to close several of its largest gas to power plants. These were not part of the LCPD, therefore unscheduled, adding to worries regarding the UK power generation capacity being weakened further. The policy costs of a bill are now increasing at an alarming rate.
Renewable Obligation (RO) requires suppliers to buy a proportion of their electricity from renewable sources. RO varies from supplier to supplier as this is dictated by their market share. The more renewable energy within a supplier’s generation mix, the lower their RO charge.
Feed-in-Tariffs (FiT) is an incentive for small-scale renewable generation, it is estimated that this scheme alone cost consumers £500 million in 2012/13. Climate Change Levy (CCL) is a levy on UK business energy use, charged at the time of supply from electricity, gas and coal for use as fuels. This is published on the HMRC website.
Contracts for Difference (CfD) will be introduced in 2015. They provide a fixed price for renewables guaranteeing them a price for energy regardless of the market e.g. the new nuclear deal £92.50/MWh, (this will replace RO) in 2018.
Policy costs make up between 19-23% of an energy bill. alfaenergy now believes that it is no longer possible to obtain a fully fixed contract for a high user of energy as suppliers can, and do, reconcile costs. We advise to budget for such costs that suppliers recoup.
alfaenergy has now broken down the bill in terms of pence per kWh and what percentage of the bill these costs represent. We must emphasise the following three points:
1. Network costs vary with site location;
2. Commodity costs vary due to market fluctuations and the time the contract was signed;
3. Policy costs vary according to supplier.
How can you mitigate these rising costs?
1. Buy smarter
2. Use less
3. Generate your own electricity