For this reason, it’s useful to examine the finances through the view of a business electricity bill breakdown and ascertain how much each element costs per kWh.
The three key elements of an electricity bill
SSE, one of the industry’s leading business electricity suppliers, has given a breakdown of the electricity bill into three key categories. Each category accounts for 33% of the total annual cost.
- Commodity (or wholesale) cost
- Non-commodity policy (or government) costs
- Non-commodity systems and transmission costs (from the supplier or National Grid)
Government policy cost components
33% of your commercial electricity bill breakdown goes directly towards the government, allowing them to cover the costs for environmental initiatives. Here are the five key elements that you may receive a charge for within this:
Renewables Obligation Certificate (ROC)
This is an initiative for the development of generating large scale renewable electricity. In March 2017, the Renewal Obligation was closed for generating new renewables. However, subsidy payments will continue for the next 20 years.
Climate Change Levy (CCL)
The Climate Change Levy is a charge only payable by commercial customers. The purpose of its implementation is to improve energy efficiency and cut carbon emissions. It was first introduced in 2001. This is just one of the ways the UK will hope to reach its target of net zero by 2050 for greenhouse gas emissions.
Feed in Tariffs (FiTs)
Feed in Tariffs were introduced to market the installation of small-scale renewable and low carbon electricity generation. This energy generation is capped with 5MW installations. Feed in Tariff payments last for approximately 20 years.
Contracts for Difference (CfD)
Contracts for Difference are the existing mechanism for low carbon generation. For each MWh generated, these CfDs guarantee a fixed price, referred to as the ‘strike price’. The duration of a CfD is 15 years and are auctioned and budgeted for by government.
Capacity Market (CM)
The Capacity Market allows for the facilitation of annual auctions for capacity. This is provided for demand side response, energy storage and power stations, and is required to maintain the security of the supply. Procurement occurs four years in advance, along with a year ahead auction. Auction volumes are set by the government.
Learn more about energy procurement for large businesses in our friendly guide.
Government policy costs and charges
Here are the current charges paid by business energy 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||0.001p||0.385p||0.536p||0.582p|
Source: BEIS survey. Data shown for 12 months ending on 31st March in each year.
From the above data, we can extrapolate that there has been a 165% increase in government levies since 2014. As a result, this added an extra £540 per year to an electricity bill of a small business that uses 20,000 kWh.
Transmission and distribution non-commodity costs
The next 33% of non-commodity electricity bill charges is derived from the use and maintenance of electricity transmission and distribution (T&D) systems. Here are the normal transmission and distribution costs you can expect:
Transmission Network Use of System (TNUoS)
Transmission Network Use of Systems costs are linked with transmitting electricity from power stations to grid supply points via the high voltage (HV) transmission network.
Balancing Services Use of System (BSUoS)
Balancing Service Use of System costs are associated with the everyday operation of the transmission system, this helps to balance the grid.
Distribution Use of System (DUoS)
Distribution Use of System charges are applied by regional utilities that manage the distribution network. These charges will cover the cost of distributing electricity to a business premises.
Some providers will give business customers the choice of having the above costs itemised and shown as a separate figure from the wholesale price. You can find out more about understanding your business energy bill in our helpful guide that explains what all the different technical terms mean.
Over the past decade, the price of electricity on the wholesale market has remained relatively stable. Nonetheless, prices do tend to fluctuate throughout the seasons of the year.
The commonly referred to ‘day-ahead’ price per MWh is £51, or 5.1p per kWh. This is the same as the average prices from 2010 and 2011.
No matter what fluctuations take place in the wholesale electricity market and across the energy industry in general, it is highly recommended that you make sure your business is on the right tariff. This will help you save money over a longer period of time. Even more so if you are on a fixed rate contract.
Commodity and non-commodity costs
We have now explained all the various commodity and non-commodity costs. This should give you a better understanding on the impact each expense has on a business electricity bill by viewing the percentage charge for each item.
To summarise, non-commodity costs are the reason prices have been soaring over the past 10 years. The above data for policy charges comes directly from the government’s Department for Business, Energy and Industrial Strategy (BEIS).
The numbers show that wholesale prices have not changed from 5p/kWh in a decade. However, the government has increased its tax levies almost ten-fold since 2008 from 0.456p/kWh to 4.332p/kWh in 2020. Therefore, it is fair to state that non-commodity costs are the reason behind larger business electricity bills.
As a matter of fact, it’s important to highlight these results as it’s not always clear how these costs are being calculated, even if they are mentioned within a business customer’s energy bill. Not everyone will be scrutinising every itemised expense line by line.
If you think you’re paying too much for your electricity or gas for that matter. Utility Saving Expert can help you compare business energy and find a more competitive tariff within minutes.