The Hidden Costs Eating Your Energy Budget: 10 Things  Manufacturers Need to Know

For SME manufacturers in the UK, energy costs aren’t just about the price of gas or electricity—they’re about the growing list of additional charges that now make up over 60% of your energy bill. These ‘non-commodity’ costs, covering everything from network charges to green levies and system balancing fees, have been rising steadily and show no signs of slowing down. If you’re not paying attention to them, you’re missing a huge piece of the puzzle. But here’s the good news: while these costs might seem out of your control, there are steps you can take to manage them. In this article, we’ll break down 10 things every UK SME manufacturer needs to know about non-commodity energy prices—where they’re headed, what’s driving them, and what you can do to keep your costs in check.

1. Non-Commodity Costs Dominate Your Energy Bill

Non-commodity costs (also known as third-party or pass-through charges) have ballooned to become the majority of a business’s energy bill. In fact, they have increased by around 50% in just four years and now make up roughly 60% of a typical UK electricity bill . This means that for many SME manufacturers, well over half of the price you pay per kilowatt-hour is not for the electricity or gas itself, but for other charges. With wholesale energy prices having spiked and fallen in recent years, these additional charges have become more noticeable as they continue to rise even when the commodity cost drops . In short: controlling your energy spend now requires understanding and managing these non-commodity charges that dominate the bill.

2. Breakdown of Non-Commodity Charge Components

Non-commodity costs encompass a range of charges that fund the energy system’s infrastructure, stability, and policy goals beyond the raw fuel cost . Key components include network charges for using transmission and distribution grids, government levies to support renewable energy (like the Renewables Obligation and Contracts for Difference), system balancing charges to keep the grid stable, and capacity market fees to ensure backup power is available. The table below summarizes the main non-commodity components and their recent trends:

Note: For gas, the non-commodity component is smaller but still present – primarily network transportation charges and environmental levies like the Green Gas Levy. Non-commodity costs account for roughly 15–20% of an SME’s gas bill on average , much lower than electricity’s share, because gas has fewer policy levies (renewables subsidies are charged to electricity). Still, gas network charges tend to rise over time (often index-linked), and future policies (like the hydrogen levy or gas grid decommissioning costs) could push these up

3. Network Charges: Paying for Transmission & Distribution

Network charges cover the cost of delivering power from power stations to your facility through the national grid and local distribution networks. For SME manufacturers, these charges show up as transmission (TNUoS) and distribution (DUoS) fees on electricity bills. They have been climbing due to massive investment needs: the UK’s drive toward net-zero means upgrading an aging grid to handle renewable energy and higher demand (e.g. EVs, electrified heat) . National Grid ESO and Distribution Network Operators are spending billions on reinforcements, and those costs are passed on to users. As a result, network tariffs have risen substantially in recent years . For example, distribution charges in some regions are set to double from 2023 to 2024 for certain supply sizes .

It’s important to know that new rules have changed how these charges are billed. Ofgem’s Targeted Charging Review (TCR) reformed network tariffs by introducing fixed charges for the residual costs, replacing the old peak-demand-based charges. This means reducing consumption during peak periods (e.g. avoiding winter evening “Triad” peaks) no longer saves as much on the residual portion of TNUoS charges . In practice, a larger share of network costs are now unavoidable fixed fees based on your connection or capacity. However, there is still a portion of DUoS that is usage-based with time-of-use elements (day/night or red/amber/green bands), and Ofgem is reviewing further changes to make future network charges more cost-reflective by 2026/27 . Bottom line: network charges are a rising cost center for SMEs, so minimizing your peak demand (where possible) and ensuring your agreed capacity is appropriately set (so you’re not paying for more capacity than you need) can help control these costs.

4. Environmental and Policy Levies: Renewables Funding on Your Bill

A significant chunk of non-commodity costs comes from government policy schemes designed to fund renewable energy, reduce carbon emissions, and ensure energy efficiency. For manufacturers, these appear as various levies on the electricity bill: the Renewables Obligation (RO), Contracts for Difference (CfD) charges, and the Feed-in Tariff (FiT) scheme costs are the big three. Together, these low-carbon policy levies add around 5 pence per kWh (or more) to electricity costs in 2024 – a considerable burden that has grown over time. The RO, for instance, has risen year-on-year (tracking inflation and increasing renewable requirements) and is now about £30/MWh ; it will remain high until the scheme winds down in the 2030s . The CfD levy has started to ramp up as more subsidized wind and solar projects come online – 2023 saw higher CfD costs as new offshore wind farms began operation . Meanwhile, the older FiT program (supporting small renewables) and certain legacy charges still contribute a few percent to bills.

These environmental levies are essentially the cost of decarbonization being passed to consumers. They fund renewable generators to build capacity that will reduce carbon emissions long-term. Notably, the Contracts for Difference mechanism can also reduce costs in high wholesale price scenarios – for example, if market electricity prices surge above the strike prices, renewable generators pay back the difference, which can offset the levy. (In Winter 2022 some CfD periods actually resulted in a credit to suppliers due to high market prices.) However, most of the time SMEs should plan for these levies to increase or stay elevated in the coming years . One recent change is that Energy-Intensive Industries (EIIs) (like steel or chemicals) have been given exemptions from paying most of these green levies (now 100% exemption for CfD, RO, FiT, and even Capacity Market charges as of 2024) . The cost of those exemptions is redistributed to all other businesses – meaning ordinary manufacturers may see slightly higher rates to cover the shortfall . While there’s no escaping these policy costs, SMEs should be aware of their impact: supporting renewables and carbon reduction does carry a price tag on your bill, typically rising faster than other charges in recent years .

5. Balancing Charges: Keeping the Grid Stable Comes at a Price

Even after paying for generation and networks, there’s the challenge of keeping the lights on second-by-second. Balancing charges (BSUoS) are the fees that cover National Grid ESO’s cost of balancing supply and demand in real time – everything from paying standby generators, to managing frequency, to handling the intermittency of wind and solar. As the grid incorporates more renewable energy (which is clean but variable), balancing has become more complex and costly . For example, when the wind doesn’t blow, National Grid might have to pay gas-fired plants to ramp up, and when there’s excess wind at night, they may even pay wind farms to curtail output. These costs are recovered through BSUoS charges, which have been rising accordingly.

A major regulatory change in April 2023 altered how BSUoS is charged: previously, generators paid a portion of balancing costs, but Ofgem decided that from 2023 only demand (suppliers/consumers) pay, to simplify the system . That means all balancing costs are now passed through to users like SMEs. As a result, many businesses saw an uptick in rates last year – one supplier noted an increase of 0.925 pence per kWh on customer bills purely due to this change . Going forward, BSUoS is being set in advance in 6-month blocks to give some predictability , but it will still fluctuate based on actual system costs. The key point for manufacturers is that balancing the grid is an increasingly significant expense that you ultimately help pay for. While you cannot avoid BSUoS charges (they apply on each unit you consume), understanding that a portion of your bill goes to keeping the electricity system stable can inform decisions like participating in demand-side response (which can, indirectly, reduce overall balancing needs – see item 10). Expect balancing charges to remain a noticeable line item as the UK adds more renewables; industry experts anticipate continued volatility in these costs with an upward trend over the next few years.

6. Capacity Market Charges: Ensuring Security of Supply

The Capacity Market charge is another line in the non-commodity mix, designed to ensure the lights stay on during peak demand periods (such as cold winter evenings). Under the Capacity Market, power stations (and other capacity providers like demand response aggregators) are paid to be available when needed, and those payments are recouped via an annual levy on suppliers (and thus on bills). For SME consumers, the cost is usually embedded in your rate and is proportional to usage. While historically smaller than other levies, capacity costs are rising. Recent Capacity Market auctions have cleared at higher prices to attract enough capacity – partly due to plant closures and the need to secure new, sometimes more expensive, capacity for reliability. According to forecasts, the capacity charge roughly doubled from ~£4/MWh in 2023 to around £7/MWh in 2025, and could reach £12/MWh by 2026/27 .

For context, £12/MWh is 1.2 pence per kWh – not huge on its own, but it adds up (around £12,000 per year for a facility using 1 GWh). This upward trend means capacity assurance is becoming costlier for everyone. The good news is that if the grid comes into surplus capacity (for instance, if many new generators or storage projects are built), these costs could level off or even dip in the late 2020s . Also, unlike some other charges, the Capacity Market cost is somewhat seasonal – it’s mostly incurred in winter months when demand is highest and capacity payments are called upon. Some SMEs participate in demand response programs to lower their demand during the critical peak periods (typically 4-7pm on winter weekdays), which not only can earn them revenue but also effectively reduces the stress on the system – helping to contain future capacity market requirements. In summary, capacity charges are the price of insurance against blackouts, and they have been climbing, so factor this into your energy budgeting and explore if you can offset it through demand-side opportunities.

7. Regulatory Changes Are Reshaping Costs

Staying on top of regulatory updates is crucial because industry rule changes can directly impact non-commodity charges. In the past few years, several key changes have come through:

Targeted Charging Review (TCR): Implemented by Ofgem, this reform overhauled how network maintenance costs are recovered. It introduced fixed charges for transmission and distribution, ending the old practice of charging large users based on peak consumption. For manufacturers, this means you may now pay a fixed annual network fee based on your connection size or voltage level, reducing the benefit of load-shifting to avoid peak charges . While this creates a fairer distribution of costs, it also means certain charges are less within your control than before.

Balancing Charge Reform: As noted in section 5, Ofgem’s decision to make BSUoS a consumer-only charge from April 2023 was a major change . This has increased the share of balancing costs you shoulder. National Grid ESO also moved to fixed-period tariffs for BSUoS to give stability , though they retain the right to adjust if costs diverge greatly .

Network Access and Forward-Looking Charges (SCR): Ofgem has been reviewing how distribution charges send price signals. Phase 1 (April 2023) cut upfront connection fees for new connections, and Phase 2 (ongoing) will likely revamp DUoS tariffs by 2026, possibly altering time-of-use rate structures . This could change the pricing between peak vs. off-peak network usage in the future – something SMEs should watch, especially those with flexibility to shift operations.

Energy Intensive Industries (EII) Relief: In 2024, the government expanded relief for EIIs on green levies to 100%, and even introduced relief on capacity market charges . To fund this, a new EII support levy will be added on other businesses from April 2025 . While the effect on any one SME’s bill will be small, it’s essentially a redistribution: if you’re not in an eligible energy-intensive sector, a bit more of your bill will go toward subsidizing those who are.

New Legislation (Energy Act 2023): The government has laid the groundwork for a Hydrogen Levy on gas bills to support low-carbon hydrogen production, expected later this decade . Also on the horizon is a Regulated Asset Base (RAB) model for nuclear power funding, which could add a charge to electricity bills to help finance new nuclear plants . These are not in effect yet for most SMEs, but they show the direction of travel – new policy priorities may introduce new charges.

Ofgem Price Controls: Every few years, Ofgem sets revenue limits for network companies (e.g. the RIIO-ED2 price control for 2023-2028). The latest round allowed significant investment in reliability and net-zero readiness, which means DNOs and the transmission operator are collecting more revenue via DUoS/TNUoS. This isn’t a single “line item” change, but it’s why you likely saw network charges creep up in 2023 and beyond.

All these changes underline that non-commodity costs are not static – they’re actively managed by regulators and government policy. SME manufacturers should keep an eye on industry news or updates from their supplier about these reforms. Knowing, for example, that fixed charges have replaced Triad charges or that a new levy is coming in 2025, gives you a chance to adapt your strategy (whether operational adjustments or contract choices) accordingly.

8. Non-Commodity Costs Are Rising – Here’s What to Expect

The clear trend is that non-commodity charges have been rising and are likely to keep climbing in the near future. Low-carbon policy costs in particular are expected to increase year-on-year for the next few years as the UK continues to invest in renewable energy and grid upgrades. Forecasts based on government data show overall third-party charges peaking around the mid-late 2020s: for instance, an Office for Budget Responsibility outlook suggests that while Renewables Obligation costs stay above £30/MWh through 2025, they may begin to taper off by 2027 as that scheme matures . Conversely, Capacity Market charges are set to peak in the next couple of years with new procurement for backup power .

In practical terms, SMEs should plan for non-commodity charges to form an even larger portion of their energy costs in the short term. If you budget only for wholesale price changes, you could be caught out by, say, a 10% rise in network or policy levies. Many suppliers provide forecasts of these charges – if yours offers an online portal or reports (for example, SSE’s portal provides NCC forecasts ), take advantage of those to inform your budgeting. On a positive note, some relief could emerge in the longer term: as legacy renewable schemes (RO and FiT) wind down in the 2030s, their costs will eventually disappear . Additionally, if technologies like offshore wind end up producing power more cheaply than expected, future CfD rounds could even lower costs to consumers. But these potential declines are years away. For the remainder of this decade, the consensus is that the non-commodity portion of energy bills will stay high or even increase . Business groups are pushing for more transparency and measures to smooth out these costs, but manufacturers should err on the side of expecting upwards pressure. The takeaway: anticipate and plan for rising third-party charges just as you do for raw energy prices.

9. Reducing Energy Use and Generating Your Own Power to Mitigate Costs

Faced with climbing non-commodity costs, one of the most effective strategies for SME manufacturers is to reduce overall energy consumption and even produce some of your own energy. Since many of these charges (like policy levies and BSUoS) are charged per kWh, cutting your usage directly cuts those costs in proportion. Improving your energy efficiency is a win-win: it lowers your energy bill and often improves productivity or product quality. Consider measures such as:

Energy Audits and Efficiency Upgrades: Conduct an energy audit to identify where your facility wastes energy – this could reveal inefficient motors, leaky compressed air systems, poor insulation, etc. Then invest in improvements like LED lighting, high-efficiency motors, variable speed drives, and smart controls for HVAC/heating . These upgrades can significantly lower consumption without compromising output. Many SMEs find that energy efficiency projects have short payback periods and immediately start offsetting the per-unit costs that non-commodity charges impose.

Process Optimization: Small changes in manufacturing processes can yield energy savings. For example, staggering the start-up of heavy machinery to avoid all equipment running at once can reduce peak demand. Optimizing oven temperatures or process timings can save fuel. Reduced consumption not only saves on the commodity cost of fuel but also trims all the levies and network charges that apply per kWh.

On-Site Generation and Storage: Installing your own generation can shield you from some non-commodity costs. Solar PV panels on your factory roof, for instance, can supply a portion of your electricity needs. Every unit of solar power you use is a unit you don’t buy from the grid – avoiding the multitude of add-on charges on that unit (you effectively bypass wholesale cost and the associated non-commodity fees). Similarly, combined heat and power (CHP) systems or biomass boilers could make sense if you have steady heat demand. Pair generation with battery storage to maximize usage of your self-generated energy and even to shave peak demand . While there’s an upfront cost, current government incentives and falling technology prices make onsite generation increasingly attractive. Over time, generating a portion of your needs insulates you from future increases in grid charges.

Every kilowatt-hour you save or generate onsite is a direct reduction in non-commodity charges you pay. Additionally, these actions align with sustainability goals – something that can bolster your brand and possibly qualify you for grants or favorable financing. Many SME manufacturers are finding that an energy efficiency drive not only cuts costs but also improves reliability of their operations (well-maintained, efficient equipment breaks down less). Start with the low-hanging fruit like lighting and air conditioning upgrades, then tackle bigger projects like process changes or solar installations as you build confidence from early wins.

10. Demand Flexibility and Smart Contracting to Manage Your Costs

Another powerful approach to manage non-commodity charges is to be smart about when and how you use grid energy. Time-based charges and contract structures mean that you can sometimes avoid or reduce certain fees with operational flexibility and savvy procurement:

Shift Usage Away from Peak Times: Some network charges (DUoS in particular) have time-of-use rates – for example, higher “Red band” distribution charges on weekdays evening peak hours. By shifting energy-intensive activities to cheaper periods (even by a few hours), you can save on those charges. Similarly, avoiding consumption during peak national demand periods in winter can reduce your exposure to capacity market stress events. This practice, known as demand side response (DSR) or load shifting, can be automated with intelligent controls . Manufacturing processes with some flexibility (like batch processes that can run at night or storage that can be chilled more during off-peak) are good candidates. Not only do you save on your bill, but National Grid may even pay you through DSR programs or interruptible tariffs for being available to cut load at critical times.

Optimise Your Agreed Supply Capacity: Many SMEs have an agreed supply capacity (measured in kVA) with their DNO. If it’s set too high for your actual needs, you might be overpaying fixed capacity charges. Review your maximum demand and consider requesting a lower capacity if feasible – this can cut your standing charge for capacity. Conversely, avoid exceeding your agreed kVA, as excess penalties can be steep. Regularly reviewing this can yield savings, as West Mercia Energy found when auditing clients’ DUoS bands .

Review Your Energy Contracts (Fixed vs. Pass-Through): Understand how your supplier is charging you for non-commodity costs. Some contracts are fully fixed, meaning the supplier has built in expected non-commodity costs into your rate for the term. Others are pass-through, where the supplier bills you the actual third-party charges as they change. There’s a trade-off: fixed contracts give budget certainty (the supplier bears the risk of cost changes), whereas pass-through contracts might save you money if you can actively manage usage or if some charges fall, but you carry the risk of increases . For many SME manufacturers, a fully fixed contract offers peace of mind and simplicity. But if you opt for pass-through to potentially benefit from your own load management, be prepared to monitor non-commodity cost changes closely. Work with a reputable energy broker or adviser to compare options – ensure any quote you consider includes all non-commodity costs (no hidden exclusions) so you’re comparing apples to apples .

Leverage Peak Reduction and DSR Schemes: Beyond just shifting usage, you can formally enroll in schemes that pay you for flexibility. The Capacity Market has a “demand side response” avenue where companies are paid to drop load when called upon. There are also National Grid run programs (like DFS – Demand Flexibility Service, or ancillary services) and local network flexibility tenders. If your operations can tolerate occasional reductions in power use, an aggregator can help you earn revenue that offsets your non-commodity costs. Essentially, you get paid to help solve the very problems (peak demand, grid balancing) that drive those costs – a smart way to turn the situation to your advantage.

Keep Communicating with Your Supplier: Non-commodity charges can change with little notice (as happened with the BSUoS change). Make sure your supplier or energy consultant keeps you informed about impending changes. They might also help by validating bills to catch any errors in pass-through cost calculations . If you have multiple sites or complex tariffs, ensure you’re being billed correctly for each charge.

In summary, demand flexibility and prudent contracting can significantly buffer SME manufacturers from non-commodity price rises. By using energy smarter and engaging with the market (either through fixed products or DSR programs), you can trim costs and even create new income streams. As SSE advises its customers: reducing consumption at peak times and exploring the right contract structure are key steps to control these charges . Proactively managing when and how you use energy not only saves money, but also strengthens the grid and contributes to a more stable energy future – a true win-win for your business and the wider system.