Rising Non-Commodity Costs

Introduction

The UK energy market has undergone significant changes in recent years, with an increasing emphasis on renewable energy sources and environmental sustainability. While this transition is commendable, it has brought about a new set of challenges for consumers such as the public sector.

One of the most pressing concerns in this evolving landscape is the rise in non-commodity costs, particularly the forecasted Distribution Use of System (DUoS) charges.

Here, we will take a look into the factors contributing to the surge in non-commodity costs and explore the implications of forecasted DUoS charges.

Understanding Non-Commodity Costs

To appreciate the significance of rising non-commodity costs, it's essential to understand what they entail. In the energy market, costs are typically categorized into two main groups: commodity costs and non-commodity costs.

1. Commodity Costs: These are the costs directly associated with the production and supply of energy, such as the cost of generating electricity and purchasing natural gas. Commodity costs can fluctuate based on factors like fuel prices and supply-demand dynamics.
2. Non-Commodity Costs: These costs cover a wide range of expenses unrelated to the actual generation of energy, including network charges, environmental levies, and taxes. Non-commodity costs are less predictable and can be influenced by regulatory changes, infrastructure investments, and market developments.

The Rising Tide of Non-Commodity Costs

In recent years, non-commodity costs have been on the rise in the UK energy market, significantly impacting energy bills for consumers. These costs have increased by some 50% over the past 4 years and now make up circa. 60% of the total delivered cost for electricity. Several factors contribute to this upward trend:

1. Renewable Energy Investments: The UK has made substantial investments in renewable energy sources, such as wind and solar power. While these investments are vital for reducing carbon emissions, they also come with increased costs for infrastructure development and maintenance.
2. Network Upgrades: The energy grid requires continuous upgrades to accommodate the growing share of intermittent renewable energy sources. These infrastructure investments are financed through non-commodity charges passed on to consumers.
3. Environmental Levies: To promote sustainability, the government imposes various environmental levies and charges, including the Contracts for Difference (CfD) scheme and the Renewable Obligation (RO) scheme. These levies aim to incentivize green energy production but add to non-commodity costs.
4. Policy and Regulatory Changes: Frequent policy changes and regulatory updates can impact non-commodity costs. For instance, changes in Ofgem's price controls and market rules can influence distribution charges like DUoS.

Forecasted DUoS Charges: A Closer Look

One of the significant components of non-commodity costs is the Distribution Use of System (DUoS) charges. These charges cover the cost of using the electricity distribution network to transport electricity from the national grid to consumers. The DUoS charges are levied by Distribution Network Operators (DNOs) and are passed on to energy suppliers, who, in turn, include them in consumer bills.

Forecasted DUoS charges have been a topic of concern due to their anticipated increase. Several factors contribute to this forecast:

1. Network Investments: DNOs are continually upgrading and maintaining the electricity distribution network to ensure its reliability and accommodate renewable energy sources. These investments are necessary but result in higher DUoS charges.
2. Decentralization: As more consumers and businesses invest in distributed energy resources like solar panels and battery storage, DNOs must adapt their networks to accommodate these changes, further driving up DUoS costs.
3. Regulatory Changes: Ofgem periodically reviews the price controls for DNOs, influencing the level of DUoS charges. Recent regulatory changes have put pressure on DNOs to enhance their networks, which can lead to higher charges.

As a worked example of the DUoS standing charge rises expected from April 24, WME considered a typical "100 kVa" electricity supply within the West Midlands region. This demonstrated a year-on-year average increase of over 100%, or an increase of £1,705 in DUoS standing charges.

Implications for Consumers and the Public Sector

The rise in non-commodity costs, particularly forecasted DUoS charges, will have significant implications for energy consumers:

1. Increased Energy Bills: Higher non-commodity costs translate into increased energy bills for consumers, making it more challenging to manage energy expenses.
2. Cost-Benefit Analysis: The Public Sector may need to reevaluate their energy consumption patterns, invest in energy efficiency measures, or explore alternative energy sources to mitigate rising costs.
3. Consumer Impact: Households may experience a higher cost of living, as energy bills make up a substantial portion of monthly expenses for many families thus increasing fuel poverty.
4. Policy and Advocacy: Consumers may advocate for more transparent pricing structures and government support to mitigate the impact of rising non-commodity costs. WME stands ready to support this.

How WME will help?

1. WME is currently in the process of another kVa review for our customers. This will help ensure your supply is in the correct banding for DUoS. If you are in a band too high, this will result in higher than required DUoS charges.
2. Price Validation – WME validates our customers’ annual prices to ensure that the correct non-commodity charges are applied. In 2023/24, this exercise identified £7.5m in overcharges which we were able to correct, ensuring this money stayed within the public sector.
3. Raising Awareness – WME will continue to raise awareness of the challenges posed by rising non-commodity costs for all consumers, including the public sector. We will advocate for our customers to Government and Ofgem where possible to help mitigate the rising costs.
4. Energy Procurement – WME will continue to deliver our risk managed energy procurement with an aim of keeping energy costs as low as possible. This will help offset any further rises is non-commodity costs, which are outside of our control.

Conclusion

The UK energy market is evolving rapidly, with a growing emphasis on renewable energy sources and environmental sustainability.

While these changes are crucial for a greener future, they have led to a surge in non-commodity costs, including forecasted DUoS charges.

All consumers, including the public sector, must be aware of these rising costs and explore strategies to manage and minimise their impact.