The cost of an electricity bill for a typical business has increased by 43% over the past ten years and almost every press release sees the energy companies blame wholesale prices for the yearly price hikes. But are wholesale prices really to blame, or are non-commodity costs on the rise?
Let’s check to see the breakdown of a business electricity bill and see how much each of the component parts costs per kWh.
The Three Key Components of An Electricity Bill
One of the leading electricity suppliers, SSE, has broken down a bill into three almost perfect segments – each contributing around 33% to your overall cost each year. The graphic below shows how the costs divide between:
- 1: Commodity (or wholesale) cost
- 2: Non-commodity policy (or government) costs
- 3: Non-commodity systems and transmission costs (from the supplier or National Grid).
1: Government Policy Cost Components
A third of your bill is now going directly to the government to pay for environmental initiatives. There are five key components that you could receive a charge for today or the coming years.
- Renewables Obligation Certificates (ROCs): A support scheme for the development of large-scale renewable electricity generation. The RO closed to new renewables generation in March 2017 with subsidy payment continuing for another 20 years.
- Climate Change Levy (CCL): Introduced in 2001, the CCL is a charge only payable by business users and is designed to improve energy efficiency and reduce carbon emissions.
- Feed in Tariffs (FiTs): Introduced to promote the installation of small-scale renewable and low carbon electricity generation capped at 5MW installations. FiT consumer payments last for 20 years.
- Contracts for Difference (CfDs) The current contract mechanism for low carbon generation, CfDs guarantee a fixed price for each MWh generated, which is the “strike price”. Contracts are 15 years in length. CfDs are auctioned and budgeted for by government.
- Capacity Market (CM): These are annual auctions for capacity to be provided by power stations, demand side response and energy storage, which is needed to maintain the security of supply. Procurement takes place four years ahead supplemented with a year ahead auction. The government sets the auctions volumes.
Government Policy Costs and Charges
Below are the current charges paid by business users per kWh.
|Climate Change Levy||0.524p||0.541p||0.554p||0.559p||0.568p||0.583p||0.847p|
|CfD Operation Levy||0.000p||0.000p||0.000p||0.005p||0.005p||0.005p||0.006p|
Source: BEIS and others (see below). Data shown for 12 months ending 31st March in each year.
There’s been a 165% increase in government levies from 2014 which added £540 per year to an electricity bill of a small business using 20,000 kWh.
2: Transmission and Distribution Non-Commodity Costs
The second quadrant of non-commodity charges come from the use and maintenance of using the electricity transmission and distribution (T&D) system. Typical T&D costs include:
- Transmission Network Use of System (TNUoS): The cost associated with transmitting electricity from power stations to grid supply points via the high voltage (HV) transmission network.
- Balancing Services Use of System (BSUoS): Costs relating to the day-to-day operation of the transmission system, for balancing the grid.
- Distribution Use of System (DUoS) charges: Applied by regional utilities that manage the distribution network to cover the cost of distributing electricity to premises.
Some suppliers allow customers the option to have these costs split and shown separately from their wholesale price.
3: Wholesale Costs
The wholesale cost of electricity has remained relatively flat over the past ten years although prices fluctuate during different seasons. The so-called “day-ahead” price per MWh is £51 (or 5.1p/kWh) which is the same as the average prices in 2010/11.
Commodity and Non-Commodity Costs 2018/19
Now all the different types of costs are explained, we can see the impact they make to a current electricity bill by the percentage charge for each item.
Conclusion: Non-Commodity Costs Are Driving Prices Higher
The data shown above for policy charges originate directly from the government’s Department for Business, Energy and Industrial Strategy (BEIS).
We’ve seen that the wholesale price hadn’t moved from 5p/kWh ten years ago, but the government has increased its tax levies ten-fold since 2008 from 0.456p/kWh to 4.332p/kWh in 2020.