Non-Commodity Costs Roundup
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Following on from the latest edition of our non-commodity costs webinar, Strategic Account Manager Mark Cox outlines some of the key factors affecting non-energy costs.

Over the past few years, we’ve seen a continuing shift on consumer bills whereby wholesale costs are making up less of a consumer’s overall electricity bill and non-commodity costs are making up more than half of all charges. The Covid-19 pandemic has further accelerated this trend.

 

Subsidies:

With the overall drop in demand caused by Covid-19, wholesale power prices dropped between March and June, with recent times seeing more of a bounce-back. This has affected the level of cost consumers pay for low-carbon energy schemes, such as the Feed-in Tariff (FiT) and Contracts for Difference (CfD).

Put simply, the FiT pays low-carbon generation an agreed tariff for generating and an agreed tariff for exporting power to the grid. As with all subsidy schemes, end consumers fund the payments, the costs of which are smeared across those eligible to pay (the charging base). However, the demand destruction we witnessed during the height of lockdown (with some end users no longer consuming altogether) now means that the charging base has become smaller, and so the cost to the end consumer has risen overall. The cost of the FiT scheme has been further increased by high load factors for both solar and wind generation over the past 3 months or so – project types which are commonly supported by the FiT where they are under 5MW.

CfDs on the other hand have risen for a different reason. Generators with a CfD are paid a guaranteed strike-price regardless of the level of the wholesale market. Where the market is lower than their strike-price, generators are paid a top-up payment to reach their strike-price. Conversely, where the market is higher than the strike-price, generators then pay back. The drop in wholesale prices therefore, caused the level of difference payments to generators to increase, resulting in a higher CfD cost for end users.

 

System & Network Costs:

The headline news on the system & network side of things is that Ofgem’s decision to change the way in which Transmission Network Use of System (TNUoS) charges is charged, has now been delayed for a year and will be implemented in April 2022.

Crucially, this means that end users will now be able to take part in Triad management to reduce their exposure to TNUoS charges in both this coming winter (2020/21) and the following winter (2021/22). Our latest estimates suggest that businesses that choose to Triad manage could save between £45-£55/kW for the coming winter.

So, whilst that offers a positive outlook moving forwards, we also need to remain cognisant of another increasing cost thanks to Covid-19: Balancing System use of System Charge (BSUoS). As previously mentioned, record low levels of demand, coupled with high levels of wind and solar generation have created a situation which made keeping the energy system in balance very difficult for National Grid. Though the System Operator has risen to the challenge through the use of both the Balancing Mechanism and the introduction of a new Optional Downward Flexibility Management (ODFM) service, the simple fact is that more actions have had to be taken in order to keep the lights on, which of course incur cost. An extreme example of this which illustrates the point, is the Spring Bank Holiday weekend (22nd-25th May) where low demand and increased renewable generation led to BSUoS reaching just under £25/MWh – a cost which typically averages at around £3.50/MWh. It’s important therefore that businesses are factoring increased costs such as these into their energy bill forecasts.

 

For more information, head over to our non-commodity costs page to view clips from the webinar, see our key takeaways and register for the next session in the series.