In short
Non-commodity costs are every part of a business electricity price other than the wholesale energy itself: network charges for transmission and distribution, balancing costs, government policy schemes such as the Renewables Obligation, Feed-in Tariffs, Contracts for Difference and the Capacity Market, metering and settlement, and taxes such as the Climate Change Levy.
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Commodity and non-commodity: the two halves of the price
A business electricity price splits into two parts:
- The commodity cost is the energy itself, bought on the wholesale market by your supplier.
- The non-commodity costs are everything else needed to get that energy to your meter and to pay for the schemes and taxes attached to it.
Ofgem's own guide to bills lists the same pieces in plain terms: wholesale costs, network costs to build and repair the wires and pipes, the supplier's operating costs, and policy costs such as government social and environmental schemes, plus VAT. Non-commodity costs can be a significant part of a business electricity price, and they can move independently of the wholesale market.
The term is used mostly for electricity, where these costs are most varied. Gas bills also carry transportation, metering and policy costs, but they are usually built into the rates.
Network charges
Electricity reaches your site over two networks, and each charges for its use:
| Charge | Who sets it | What it pays for |
|---|---|---|
| Transmission Network Use of System (TNUoS) | The National Energy System Operator (NESO), using a methodology approved by Ofgem | The national high-voltage transmission network |
| Distribution Use of System (DUoS) | Your distribution network operator (DNO), in its published charging statement | The regional network of cables and substations that brings power to your premises |
| Capacity charges | Your DNO, for half-hourly sites | The supply capacity in kVA agreed in your connection agreement |
DUoS for larger sites varies by time of day, with more expensive bands at peak times, often described as red, amber and green. After Ofgem's Targeted Charging Review, the "residual" part of network costs that is not linked to how or when you use the network is recovered through fixed charges, with non-domestic sites placed in bands. That is one reason business energy standing charges differ between sites. Half-hourly sites also pay electricity capacity charges on their agreed capacity.
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Balancing costs
Supply and demand on the electricity system have to match second by second. The system operator pays generators and others to increase or reduce output to keep it balanced, and recovers the cost through Balancing Services Use of System (BSUoS) charges.
NESO's charging rules now recover BSUoS solely from final demand, the electricity that customers use, and set it as a fixed tariff in advance for each period rather than a figure that changes every half hour. Suppliers pass that cost on in their prices.
Other industry costs sit alongside balancing, such as the costs of the settlement system run by Elexon that matches what suppliers buy with what their customers use.
Government policy schemes
Several government schemes are funded through charges on electricity suppliers, which then recover the cost from customers. The main ones are:
- Renewables Obligation (RO): suppliers must present Renewables Obligation Certificates for a share of the electricity they supply, or pay into a buy-out fund. Ofgem administers it. It closed to new generating capacity on 1 April 2017 but continues to support existing stations.
- Feed-in Tariffs (FiT): payments to owners of accredited small-scale generation, such as solar panels. Ofgem spreads the cost across all licensed electricity suppliers in Great Britain through a process called levelisation.
- Contracts for Difference (CfD): long-term contracts that pay low-carbon generators the difference between a fixed strike price and the market price. They are funded by the Supplier Obligation, a compulsory levy on electricity suppliers collected by the Low Carbon Contracts Company. When market prices are above the strike price, money flows back to suppliers.
- Capacity Market: payments to providers of reliable capacity so that enough is available at times of peak demand, funded through charges on electricity suppliers.
The cost of each scheme is set by its own rules and timetable, so the amount built into your price can change from year to year. The government also provides relief from some of these scheme costs for eligible energy-intensive industries; your trade association can tell you whether your business might qualify.
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Metering, settlement and supplier costs
Every supply point needs a meter, someone to maintain it, and someone to collect and process the data. On smaller sites these services are arranged by the supplier and recovered in the standing charge. On half-hourly meters the meter operator and data services are often contracted separately, either through the supplier or directly.
Meter operator (MOP) contracts are one of the services Fidelity Energy offers, and we can help you include them when you ask for a quote.
The supplier also has its own operating costs (billing, customer service, credit risk and its margin) and, where a broker is involved, commission that is shown in your contract's principal terms.
Taxes: Climate Change Levy and VAT
Climate Change Levy (CCL) is charged by the supplier per kWh on business electricity and gas, at rates set by the government from 1 April each year. It is sometimes grouped with non-commodity costs because it is not part of the energy price, but it is a tax with its own exemptions and reduced rates for Climate Change Agreement holders. See our Climate Change Levy guide.
VAT is charged on the total, including CCL. Business energy is normally charged at the standard rate unless some or all of the supply qualifies for a lower rate. See reduced rate VAT on business energy.
Taxes are charged at the rates in force whatever kind of contract you are on, fixed or pass-through.
Fixed and pass-through contracts treat these costs differently
How non-commodity costs reach your bill depends on your contract:
| Fully fixed contract | Pass-through contract | |
|---|---|---|
| How non-commodity costs are priced | Estimated by the supplier for the whole term and built into your rates | Charged at the actual rates as they change |
| Who carries the risk if they rise | The supplier | You |
| How they appear on the bill | Combined into the unit rate and standing charge | Often as separate lines, closer to the underlying charges |
| Taxes (CCL and VAT) | Charged at the rates in force | Charged at the rates in force |
Ofgem's guidance for microbusinesses notes that some factors in energy bills may change during a contract and may be presented on a pass-through basis. Some contracts fix certain non-commodity elements and pass through others, so ask exactly which. Our guide to pass-through energy contracts explains the structure, and fixed rate business energy covers what a fixed contract can still leave open.
Questions to ask about non-commodity costs in a quote
Two quotes with similar unit rates can treat non-commodity costs very differently. Before you agree, ask:
- Which non-commodity costs are fixed for the term, and which are passed through?
- Are network charges, including any capacity charges, fixed or charged at the network operator's current rates?
- How will policy scheme costs be handled if they change during the term?
- What happens if a new government charge is introduced while the contract is running?
- How will passed-through items appear on the bill, and how are they reconciled?
- Where is broker commission shown in the principal terms?
The answers decide how much budget certainty you have. For most smaller businesses a fully fixed price is simpler; larger and half-hourly sites more often weigh up the trade-off between certainty and seeing each charge at cost.
How we can help
Non-commodity costs are hard to see on a combined bill, and harder still to compare across quotes that treat them differently. We act as an agent for Fidelity Energy, an independent business energy consultancy and broker, and introduce you to it. We help you gather the bills, half-hourly data and capacity details a quote needs. Fidelity Energy gets quotes from its network of business energy suppliers, and we can help you ask which costs each quote fixes and which it passes through. Fidelity Energy's services also include bill validation and half-hourly reporting.
Want quotes that show the non-commodity side clearly? Contact us and ask us for a quote. To compare offers or change supplier, see business energy comparison on our sister site.
How Forever Communications helps with business gas and electricity
Forever Communications is part of Forever Group, which looks after phone systems, business mobiles and connectivity for UK organisations. For business electricity and gas, we work as an agent of Fidelity Energy, an independent business energy broker that prices your requirements with the suppliers on its panel. We are not an energy supplier, and neither is Fidelity Energy.
- Make sense of your bills: we can help you read unit rates, standing charges, meter details and the other costs on your invoices
- Like-for-like quotes: we help you gather your meter numbers, consumption and contract end dates so suppliers quote on the same basis
- The right tariff type: we can talk you through fixed, flexible and pass-through contracts, green electricity and green gas options before you decide
- Better timing: we help you plan a renewal ahead of your contract end date, or move off deemed and out-of-contract rates when you move premises
- Your choice: you decide which quote, if any, to accept; prices and terms are set by the suppliers and confirmed at quote, including the broker commission
We work with offices, shops, hospitality, landlords, manufacturers and multi-site organisations. Send us a recent bill and we can take it from there.
Frequently asked questions
What are non-commodity costs?
They are the parts of a business electricity price that are not the wholesale energy: transmission and distribution network charges, balancing costs, government policy schemes such as the Renewables Obligation, Feed-in Tariffs, Contracts for Difference and the Capacity Market, metering and settlement, and taxes such as the Climate Change Levy.
Why are non-commodity costs rising?
Each element is set by its own rules: network charges by network companies under Ofgem's price controls and charging methodologies, policy costs by each scheme's timetable, and taxes by government. When any of them increases, suppliers pass the cost on, either at the next contract or straight away on a pass-through contract. We do not forecast them.
Are non-commodity costs included in a fixed energy contract?
On a fully fixed contract the supplier estimates them for the term and builds them into your rates. Some fixed contracts pass certain elements through, so check the terms for which costs are fixed and which can change.
What are pass-through charges on an electricity bill?
They are non-commodity costs that the supplier passes on at the rates that actually apply, rather than fixing them in advance. Typical examples are distribution and transmission network charges, balancing costs and policy scheme costs.
Do gas bills have non-commodity costs?
Yes. Gas bills also carry transportation, metering and policy-related costs and Climate Change Levy. They are usually built into the unit rate and standing charge rather than shown separately.
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