Non-Commodity Costs – 4 things you should know

Let us begin with a few facts on the Non-Commodity costs that exist in your Electricity bill; the ones which are over and above the actual electricity consumption charges; of an industry, an organisation or any individual household. The non-commodity charges primarily fall under two broad categories; Transportation-Distribution cost, and Government Levies and Taxes. As per reports, these charges have been on a consistent rise over the last decade, inflating the final electricity invoices; even at times when the wholesale electricity costs were a record low.

A few facts below provide a quick highlight of the trends and predictions so far in these prices. 

Trends and predictions for Non-Commodity Energy costs

  • The non-commodity charges accounted for around 23% of a consumer’s bill in 2009. However, with their consistent rise year-on-year, these are predicted to become 61% of the bill, by the end of 2020.
  • Industry specialists estimate that there could be a 40-45% increase in these rates by the year 2028.
  • The transitions in the Energy market are predominantly the ones influencing these costs. These include the move towards renewables and a higher focus on low carbon energy generation, re-investment in aging grids for better integration of the newer forms of energy generation, and others.
  • According to the International Energy Agency (IEA), utilities have committed to invest considerably in renewable energy. That is, from $135B in 2014 to $250B by 2030. Therefore, non-commodity charges will continue to rise and impact more and more consumer electricity bills.

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projection of non-commoddity costs energy bill

Climate Change programs to play a prominent role in pushing Non-Commodity costs

Renewables and low carbon forms of energy generation are going to take center stage in the years ahead. Reports suggest renewable energy will make up to 80 percent of global electricity production by 2050. Consequently, power companies will need to work on balancing the energy mix and build reliability through back-up and storage mechanisms. 

Hence, non-commodity or hidden costs will account for the largest increase in electricity prices in the coming years. And it becomes significant for industries to design strategies focused on managing these cost elements along with their overall energy transition efforts. 

Here we draw upon a few ways for enterprises to effectively manage these non-commodity charges

1. A holistic Energy Management program

Today’s energy market is evolving at a rapid pace. To keep abreast of the trend, organisations need to create good Energy Management plans that entail a comprehensive approach, rather than a piecemeal effort, where the focus is only on procurement. 

It means, while we are working on energy strategies towards a balanced Energy Mix, we also need to identify the ideal mechanism for its optimisation. For instance, an organisation should be able to identify peak demand hours so that it can switch to renewables, reducing the grid load in those high-demand phases. Over time, these steps play a prominent role in controlling the non-commodity prices. 

In addition to this, there are several benefits, which are being extended by the Government in a bid to push renewables. Leveraging these programs, offered in the form of tax exemption, subsidies and other incentives, can be vital in controlling the rising bill amounts.  

2. Smart Energy Procurement built on data and analytics 

Effective energy purchasing is the foundation for reducing the overall energy budget.  

Considering that, Smart Energy procurement is an amalgamation of several elements ranging from leveraging data analytics, c-suite involvement in procurement decisions, in-depth understanding of your business, cross-functional collaboration, and most importantly knowledge about the energy market trends. For Smart Procurement, the energy consumption of an enterprise needs to be monitored. 

It also works as the preceding step to securing an energy supply contract that best fits a company’s needs. A firm can decide to either have these costs fixed, or make them fully variable at the beginning of the contract. Since both have pros and cons, the right course of action depends on the broader energy strategy, the company’s current energy mix, and available energy storage systems.  

3. Managing energy consumption during peak demand hours

Time of Use (TOU) is another critical factor for analysing your electricity bills. TOU, as a concept, was established in the early 90s to make the price of electricity more prudent, thereby balancing the demand and supply of it. 

One of the key ways to manage peak demand hours is by exploring the possibility of on-site energy storage. A well-planned battery storage system aids in load shaving and load reduction when there is a spike in usage. It helps in controlling the peak hour demand charges that an organisation will otherwise have to incur.  

Facility Managers and Energy Managers play a prominent role here by understanding the different rate structures available from their utilities. They can identify the ones that can control the final cost of their energy invoices based on the enterprises’ usage. 

4. Efficient Price Risk Management Strategy

With the upsurge of non-commodity costs, smart energy procurement is just one aspect of a thorough risk management plan. The unpredictable environment calls for a deep understanding of the constantly shifting energy markets. It poses as a complicated task for businesses to be completely sure of their purchasing strategy.

An effective price risk management strategy is what is required for businesses to be able to navigate through market volatilities and uncertainties. A number of factors can be considered while drawing up a well-rounded price strategy. These include; protecting your margins, fixing budgets, predicting and combating market volatility and all this while maintaining your competitive edge. 

Tracking and analyzing energy markets provides enterprises with the opportunity to leverage market intelligence and make well-informed energy purchasing decisions. These in turn equip the procurement managers to deliver best-priced power for its organisation.

Conclusion

Efficient management of the non-commodity prices requires an integrated approach, ranging from the broader energy management strategy of procurement to billing and consumption. It demands greater agility and flexibility to be able to embrace self-generation, storage, back-up systems, technology know-how and demand response. 

Efficient planning of these costs is critical along with the overall strategy, to achieve optimised saving across the entire gamut of energy spends.