Business Energy Tariffs, Rates and Prices Explained
Business energy can be confusing. Whether it’s the range of business energy tariffs on offer, the number of different charges that may apply, or the factors that affect wholesale prices, there’s a lot to unpack. But knowing what’s what can help ensure you get the right deal for your business.
When it comes to your business energy bills, there can be a lot to get your head around. Especially if you haven’t dealt with business gas or electricity before.
But with the UK energy crisis causing a sharp rise in costs for businesses, now more than ever it is important to understand what you are paying and why you are paying it.
So read on to find out what business energy tariffs are available to you, what affects your business energy rates, and what causes business energy prices to go up and down.
Types of business energy tariffs
While there is overlap with the types of deals you are offered as a domestic consumer, there are a number of business energy tariff options that won’t be available to your average household.
This is not to mention the fact that business energy contracts typically last between one and five years, compared to the 12-month contracts available to domestic customers.
There are several types of business energy tariff to be aware of:
- fixed rate
- variable rate
- deemed and out-of-contract rates
- rollover rate
- flexible rate
Which of these your business is on, and which is most suitable, will depend on various factors. You can find more information about each below.
Much like with domestic energy, a fixed-rate business energy tariff would lock in your unit cost per kilowatt hour (kWh) for the length of your contract. This wouldn’t lock in the cost of your bill, however, as that would be determined by how much gas and electricity you use.
Although you won’t know your exact bill each month, a fixed-rate business energy tariff may make it easier for you to track the cost of your usage, and the benefits of making your business more energy efficient.
A variable tariff is essentially the opposite of a fixed-rate tariff. Instead of your unit rate being locked for a set period of time, it will rise and fall with the wider energy market. This means sometimes you could be paying less than a fixed-rate tariff, while at other times you could be paying more.
The risk of a variable rate is that if energy prices spike, you will end up paying a lot more for your business energy.
Deemed and out-of-contract rates
If you move into a new business premises, you will inherit the previous tenant’s business energy supplier. But you won’t inherit their contract. If you don’t agree to a contract ahead of time, you will instead be placed on a ‘deemed rate’.
An out-of-contract business energy rate, like a deemed rate, is one you haven’t chosen. It often covers the in-between period when you have given your supplier notice that you are not renewing your contract, but before you have agreed a new contract or switched supplier.
Sometimes ‘deemed’ and ‘out-of-contract’ are used interchangeably by business energy suppliers. Regardless, these are usually among the most expensive types of business energy tariffs. However, with both, you are free to switch suppliers, or agree to a new contract with the existing supplier, at any time.
If your business energy contract comes to an end and you take no action to secure a new one, you may be placed on a rollover contract.
Like deemed and out-of-contract rates, a rollover tariff is typically more expensive than your average business energy contract. Where it differs from those other tariffs, however, is that a rollover tariff is more difficult to get out of. You may be tied to this contract for 12 months minimum. This is why it is so important to make a note of your renewal periods, and frequently check for correspondence from your supplier.
If you are a micro business – that’s with nine or fewer employees – your rollover contract cannot last longer than 12 months.
If you are a larger business, with the capacity to dedicate time to your business energy needs, then you may be offered a flexible rate. This is where you are in control of both when you buy your energy throughout the contract, and how much you buy. This means you can potentially take advantage of dips in the price of wholesale energy, but it can also leave you at the mercy of market movements.
» COMPARE: Business electricity
How is my business energy bill calculated?
You may think that your business energy bill is dictated purely by your usage, and your unit rate. However, there are a number of other charges that go in your bill that you may not be aware of.
While you might not be in control of some of these costs, knowing what they are and how they affect you may help inform your decisions when your contract is up.
These charges can typically include:
- unit rate
- standing charge
- Climate Change Levy (CCL)
- network charges
- metering costs
- government policy costs and charges
Not all of these charges will necessarily be displayed on your bill. However, that doesn’t mean you won’t be paying them. You can find out more about each below.
Your unit rate is the amount you pay per kilowatt hour for your business electricity or gas. If you are on a fixed tariff, this rate will be the same throughout your contract. If you are on a variable tariff, it will go up and down alongside wholesale energy prices.
Generally, the bigger your business, and the more energy you consume, the lower your unit rate will be.
The bulk of your energy bill will be made up of your kilowatt hour usage multiplied by the unit rate.
On top of your unit rate, you will pay a daily standing charge. This is the cost charged by your supplier for providing you with energy, whether you are using any energy that day or not.
While every business electricity rate will include a standing charge, the same is not true for business gas. However, business gas tariffs without standing charges will often have higher unit rates as a result.
The standard rate of VAT for business energy is 20%. However, if you meet certain requirements you will be charged a reduced rate of 5%. To be eligible for a reduced rate:
- For business electricity, your usage needs to average less than 33kWh a day, or 1,000 kWh a month.
- For business gas, your usage needs to average less than 145 kWh a day, or 4,397 a month.
Climate Change Levy (CCL)
Another added cost of business energy is the Climate Change Levy (CCL), which is charged on the kWh units you use. This was brought in by the government with the aim of promoting greater energy efficiency, and reducing gas emissions.
If you are eligible for the reduced 5% VAT rate, however, you will not pay the Climate Change Levy.
You will also be charged to cover the costs of using and maintaining the country’s gas and electricity networks. These network charges are passed on by your supplier, therefore contributing to your overall bill. They also vary over time and may cause your business energy bill to become more expensive.
These charges may include:
- Transmission Network Use of System (TNUoS)
- Balancing Services Use of System (BSUoS)
- Distribution Use of System (DUoS)
Whether these charges are listed separately on your bill is down to your supplier.
This is related to the cost of using and maintaining your gas and electricity meters, whether they are traditional or smart meters.
You won’t pay up front to have a smart meter installed. The cost of installing and using smart meters is folded into yours, and everyone else's, energy bills.
Other government policy costs and charges
Similar to the network charges, there are a series of other government policy costs that may be passed on to you by your supplier. Like the Climate Change Levy, they are largely linked to promoting environmental schemes. These can include, but are not limited to:
- Renewable Obligation Certificates (ROCs)
- Contracts for Difference (CfDs)
- Feed in Tariffs (FiTs)
- Capacity Market (CM)
Again, like the network costs, these may or may not be shown on your bill, depending on your supplier.
What else is on my business energy bill?
On top of the charges mentioned above, you will find other important details on your business energy bill. These can include, but are not limited to:
- Outstanding balance and pay-by date: this is the amount you need to pay, and when you need to pay it by.
- Usage in kWh: this is how much electricity or gas you have used in the stated time period, in kilowatt hours.
- Billing period: this is the period of time the bill is covering.
- Contract details, including end date: this is the details of your contract. It is important to be aware of your contract end date, in order to make sure you don’t get caught out and put on a more expensive rollover contract.
- Reading type: this will let you know whether your usage has been estimated, or is based on an accurate reading submitted by yourself or from a smart meter.
- MPAN/MPRN number: this is the unique identification number for your business premises. Your MPAN number covers electricity, while your MPRN number is for gas. You may need these to hand if you switch business energy suppliers.
» COMPARE: Business gas
What affects business energy prices?
Even if you are on a fixed-rate tariff, it is likely you will need to switch suppliers or sign a new contract at some point. That is why it is good to know what affects business energy prices, so you can try to get the best deal at the right time.
At a basic level, the higher the demand for energy, the more wholesale energy prices will go up. Similarly, the lower the supply of wholesale gas and electricity, the more business energy will cost. Of course, the inverse is also true: if demand falls, or supply increases, prices may drop.
There are a number of factors that can affect supply and demand. For example, a snap of unexpected cold weather could increase demand for energy, but also deplete the supply of something like natural gas in the long term. Similarly, a drop in wind speeds may reduce the amount of renewable energy generated by wind turbines.
But it’s not just the weather that can influence energy costs. More wide-reaching problems around the globe may also end up altering the price of energy in the UK, for reasons both obvious and obtuse.
The Covid-19 pandemic caused demand for energy to fall, especially in the industrial sector, and this was reflected in lower business energy prices. However, renewed activity on the other side of lockdown has caused demand, and therefore costs, to shoot up, contributing to the UK energy crisis.
Even relations with Russia can affect the European gas supply, while oil prices are impacted by a range of factors, such as wars, sanctions and other international crises.
Due to the imported nature of much of the UK’s energy supply, business energy prices are also at the mercy of currency fluctuations. Broadly speaking, the stronger the pound, the more euros or dollars it can buy and the cheaper your energy should be. If the pound weakens, however, energy prices might start to creep up.
» COMPARE: Business energy with NerdWallet
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Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more