Understanding Energy Charges: A Breakdown of Non-Commodity Costs

Commodity vs non-commodity, what’s the difference?

When you look at your electricity bill, it’s easy to assume the total charge is simply the cost of the energy you’ve used. However, a significant portion of what you pay is made up of “non-commodity costs.” While the commodity cost is the price of the electricity itself, non-commodity costs are a collection of essential charges that fund everything from maintaining the national grid to supporting the UK’s transition to a net-zero economy.

Wholesale Energy(Commodity)

Definition: The physical energy (gas or electricity) being purchased for consumption by the consumer over the agreed contract term.

Pricing: Prices are highly volatile and influenced by factors like supply and demand, weather, global events, and carbon prices.

Impact: It is the largest single component of an energy bill and a major driver of the prices that consumers pay.

Non-Commodity Costs (Unit Rate)

DUoS Variable

Distribution Use of System

Purpose: To cover the Distribution Network Operators’ (DNOs) costs for maintaining and operating the local electricity grid.

How it works: Charges are based on time-of-use (ToU) bands (Red/Amber/Green) for businesses, with rates differing significantly depending on the time of day the electricity is consumed.

Cost: Rates vary by region depending on the specific DNO. Charges are highest during periods of high demand (red time periods). Recent regulatory changes, such as the Targeted Charging Review (TCR), have shifted some of the cost from variable unit rates to fixed daily charges.

Impact: Affects electricity bills; shifting energy use to cheaper, off-peak periods (Green band) can significantly lower costs.

TNUoS Variable

Transmission Network Use of System

Purpose: To cover the cost of using the high-voltage national transmission network and to encourage the efficient, location-based use of that network.

How it works: The variable charge depends on location, amount, and timing of usage, and meter type. Costs vary by location, with sites in high-cost regions (like London) facing higher charges.

Half-hourly meters: Charges are based on usage during the three highest demand periods (Triads) between November and February.

Non-half-hourly meters: Charges are based on overall consumption between 4 p.m. and 7 p.m.

Impact: Provides a financial incentive for large users to reduce or shift their consumption during key periods of high system stress.

AAHEDC

Allocation of Aids to the High-Cost Distribution Area

Purpose: To subsidize the high cost of distributing electricity in sparsely populated areas, specifically to assist the distribution network in the North of Scotland.

How it works: The charge is levied on all licensed electricity suppliers in Great Britain based on their total energy consumption.

Cost: Recovered from all licensed electricity suppliers and subsequently passed on to all consumers across Great Britain.

Impact: Helps to prevent distribution charges in northern Scotland from being significantly higher than those in other, lower-cost regions.

BSUoS Variable

Balancing Services Use of System

Purpose: To cover the day-to-day costs incurred by the National Energy System Operator (NESO) for balancing the electricity transmission system (including the balancing mechanism and ancillary services).

How it works: The tariff is set as a fixed £/MWh rate that is determined in advance for a set period.

Cost: As of April 2023, BSUoS charges are recovered solely from electricity suppliers (final demand customers), having shifted from the previous system where both generators and suppliers paid.

Impact: The move to a fixed, forward-looking tariff has reduced the high volatility that characterised the historical half-hourly charge, improving cost forecasting.

Capacity Market

Purpose: The primary goal is to ensure security of electricity supply and prevent blackouts by encouraging sufficient investment in new power generation and other forms of capacity.

How it works: The government holds auctions (typically four years ahead). Successful capacity providers receive a steady capacity agreement payment in return for being available to provide power during times of system stress.

Cost: The costs of the capacity agreements are recovered from electricity suppliers based on their share of consumption, and then passed on to consumers via their bills.

Impact: Provides a stable revenue stream for power plants, helping to make them financially viable and supporting long-term reliability and investment in the grid.

EII Support Levy (ESL)

Energy-Intensive Industries

Purpose: To fund the Network Charging Compensation (NCC) scheme, which grants a 60% discount on network charges (TNUoS, DUoS, and BSUoS) for Energy Intensive Industries (EIIs).

How it works: The charge is applied per megawatt-hour (MWh) and is levied on electricity suppliers.

Cost: All non-domestic electricity users in the UK who are not classified as an EII pay this charge, as it is recovered by suppliers and passed on to these customers.

Impact: Helps major energy consumers (such as those in the steel and cement sectors) remain competitive in international markets by offsetting high network costs.

FiT

Feed-in Tariff

Purpose: A government scheme that provided payments to encourage small-scale renewable energy generation (e.g., solar panels and wind turbines).

How it works: Participants received a payment for the electricity generated and an additional payment for any surplus electricity exported to the grid.

Cost: The costs of the scheme were covered by a levy on all licensed electricity suppliers, which are passed on to consumers.

Impact: Helped drive the growth of small-scale renewables; the scheme is closed to new applicants (since 2019) and has been replaced by the Smart Export Guarantee (SEG). However, since applicants typically signed up to a 20 year term, the charge will continue for many years to come.

REGO

Renewable Energy Guarantee of Origin

Purpose: A certificate that proves electricity was generated from a renewable source, ensuring transparency for “green” tariffs.

How it works: Ofgem issues one certificate for every megawatt-hour (MWh) of renewable electricity produced.

Cost: Electricity suppliers source REGOs from generators to verify their “green” tariffs; this commercial cost is factored into the price of those tariffs.

Impact: Provides consumers with confidence that the electricity they purchase is from a renewable source.

RO/ROCs

Renewable Obligation Certificates

Purpose: A government scheme that required electricity suppliers to source a growing proportion of their electricity from qualifying renewable sources.

How it works: Suppliers meet their obligation by buying Renewable Obligation Certificates (ROCs) from RO registered renewable generators. If suppliers are unable to source sufficient ROCs from RO registered generators, they are required to pay the buy-out price for any shortfall.

Cost: Suppliers typically charge consumers the buy-out price (or close to this) for each Compliance year and deliver either ROCs to OFGEM or pay the actual buy-out price. Either way, this charge is passed through to consumers via their electricity bills.

Impact: Was instrumental in driving the initial growth of the UK’s large-scale renewable energy sector (e.g., onshore wind farms). The scheme is now closed to new generation.

RAB

Regulated Asset Base

Purpose: A funding model designed to attract private investment for large, high-cost infrastructure projects, such as new nuclear power plants.

How it works: Investors receive a regulated return on their investment from the start of the project, including throughout the construction phase.

Cost: Costs are recovered from consumers through a new charge on their electricity bills, meaning consumers pay for the project before it is even operational.

Impact: By reducing financial risk for investors, the model is expected to lower the overall cost of the project and deliver long-term savings for consumers compared to other funding methods.

Non-Commodity Costs (Standing Charge)

DUoS

Distribution Use of System

Purpose: A charge paid by electricity suppliers to the Distribution Network Operator (DNO) for the use of the local electricity distribution network. It covers the costs of building, maintaining, and operating the local grid.

How it works: A fixed daily fee charged by your energy supplier to cover the general costs of the distribution network and supply infrastructure.

Fixed charge: This is a standing charge based on the size and type of the electricity supply connection (e.g, kWh/ KVA capacity). It covers the costs of maintaining and operating the network infrastructure.

Impact: DUoS fixed charges ensure that the essential infrastructure of the local electricity network is funded and maintained, regardless of consumption levels.

TNUoS Fixed

Purpose: The fixed, or “residual/ non-locational” TNUoS charge covers shared transmission network costs—like building, maintaining, and operating the national grid—that aren’t tied to a user’s location.

How it works: A user’s agreed capacity is a key factor in determining the size of their residual charge. It is a fixed, per-site charge levied on a daily basis, regardless of a user’s actual electricity usage during that day.

Cost: The fixed portion of the TNUoS charge is determined by a rate set by the National Energy System Operator (NESO) and approved by Ofgem. Unlike the variable portion, it does not depend on a user’s specific location or time of use.

Impact: As of April 2023, the fixed charge is recovered from electricity suppliers based on their consumption or capacity banding. This cost is then passed on to consumers.

Metering Costs

Purpose: To recover the expenses associated with installing, maintaining, and operating electricity meters that accurately measure consumer usage for billing and grid management together with data collection and processing.

How it works: Metering costs are part of energy suppliers’ operating expenses and typically cover the installation, maintenance, and data management of electricity meters.

Cost: Costs vary based on meter type.

Conclusion

Understanding non-commodity costs is key to making sense of your electricity bill. These charges, while often overlooked, play a vital role in keeping the lights on—literally and figuratively. They fund the infrastructure that delivers power to homes and businesses, support environmental initiatives, and ensure the system remains resilient and future-ready. As the UK continues its journey toward net zero, non-commodity costs will remain a crucial part of the energy landscape, reflecting the broader goals of sustainability, reliability, and innovation.