What makes up my Energy Price?

What makes up my Energy Price?

Following the energy crisis seen in 2022, businesses have become more acutely aware of the price of energy and how much energy they use, yet many businesses still do not understand what elements make up gas or electricity invoice.

This article aims to provide a bit more clarity on what makes up your energy bill, and is written for those buyers who are energy market novices.

Commodity and Non-Commodity Costs

Both gas and electricity costs are made up of two fundamental elements, 1. the commodity (gas or electricity) and 2. non-commodity costs.

The Commodity Cost is related to the gas or electricity wholesale commodity cost, i.e. how much it costs to buy a KWh of gas or electricity on the wholesale market at any given time. The Non-Commodity Costs relates to costs associated with maintaining & balancing the energy network, transporting the energy to your meter, and associated environmental taxes to fund the decarbonisation of the grid.

In Drax’s Spring Third Party Cost (TPC) guide, they estimate that 41% of your 2024/2025 electricity invoice will be related to the wholesale commodity cost of electricity, with the remaining 59% related to the Non-Commodity Costs, as shown on the pie chart below.

Gas on the other hand is weighted the other way around, with approximately 65% of your gas invoice related to the Commodity (the cost of gas), and 35% related to Non-Commodity Costs.

There are exemptions available for some of the environmental costs, subject to your industry sector and consumption processes, but the vast majority of the Non-Commodity Costs are regulated, so there isn’t much you can do to avoid them, except not use the energy in the first place..

You can impact the Commodity Cost by entering into a gas or electricity supply contract at the most opportune time. However, energy commodity markets are highly volatile as shown by the following chart.

Looking at the above chart, if you had agreed an electricity supply contract in October 2022, the wholesale commodity cost would have been c£360/MWh, or 36p/KWh. If you were able to wait and subsequently agreed an electricity supply contract in March 2023, the wholesale commodity cost would have been c£140/MWh, or 14p/KWh. A 67% difference!

This example is extreme as is was at the peak of the energy crisis, but the challenge of procuring at the lowest point in the market remains the same. Our Procure service aims to help you time your gas and electricity supply contract procurement, to maximising your chances of getting the lowest prices. To find out more click here.

How to avoid these costs?

Ultimately, the only real way to avoid Commodity and Non-Commodity Costs is by not using the energy in the first place. Investing in energy efficiency and renewable technology initiatives can reduce/remove the need of sourcing energy from the grid, and avoiding these costs. Our Reduce service can support you in this regard. To find out more click here.

Summary

So in summary in answer to the question, What makes up my Energy Price?  your bill is made up of costs associated to the type of energy you are consuming, and the remainder is related to regulated costs associated with transporting the energy, maintenance, balancing and decarbonising the energy system.

If you have any feedback or questions on this article, please do get in touch by emailing connect@mindfulenergy.co.uk, we would love to hear your constructive feedback.