How much does business electricity cost?
The cost of your business electricity bill will depend on a range of factors, including:
- which type of tariff you are on
- the unit rate cost per kWh
- the cost of your standing charge
- your usage, itself informed by business size and industry
What is a good business electricity rate?
Due to the vast differences between industries, there is no one ‘good’ business electricity rate, but rather only what is ‘good’ for your specific business.
There are two main factors to consider when trying to work out if a business electricity rate is ‘good’ for you:
- How does it compare to your current rate?
- How does it compare to what is being offered by other business electricity providers?
Depending on the length of your business electricity contract, the second question might be more important than the first. This is because wholesale energy costs can change dramatically, even in the space of 12 months.
Why is business electricity so expensive?
While the reason behind the increase in business electricity prices is down to rising wholesale costs, there are numerous factors behind the surge in those wholesale costs.
This includes pent-up demand released by the easing of Covid-19 restrictions, which followed greater energy usage during the cold winter of 2020/21. Most recently, the conflict in Ukraine has put further pressure on supplies, especially with Russia cutting supplies of the Nord Stream gas flow to Europe in July 2022.
These events have had the effect of pushing electricity prices higher, as the wholesale cost of electricity is linked to the price of gas.
» MORE: UK energy crisis?
Is business electricity cheaper or more expensive than domestic energy?
Although the electricity may come from the same source, and maybe the same supplier, there are a number of differences between domestic and commercial electricity.
The most important differences are:
- Business electricity tends to be cheaper per unit than domestic electricity.
- Business electricity contracts are normally longer than for domestic households.
- You cannot have a dual energy contract for business electricity and gas.
- VAT is charged at 20% for most businesses, and at 5% for domestic households.
- Broadly speaking, it is not possible to exit a business energy contract early.
- Business electricity is subject to the Climate Change Levy (CCL).
How much is business electricity per kWh?
As with your overall bill, the price of business electricity per kilowatt hour can vary greatly from organisation to organisation.
According to the Department for Business, Energy & Industrial Strategy, this was the average cost of electricity in pence, per kWh, including the Climate Change Levy, for Q2 2022:
- Micro business: 22.43p
- Small business: 21.04p
- Medium business: 18.47p
- Large business: 17.35p
- Very large business: 18.31p
- Extra large business: 17.75p
Are business electricity prices going up?
Just as domestic energy prices are expected to rise this year, business electricity costs are likely to further increase in 2022.
Cornwall Insight, an energy management consultancy firm, had previously stated that business energy costs could increase five-fold for companies renegotiating their contracts from October 2022 onwards. Forecasts such as this helped inform the Energy Bill Relief Scheme.
Are business electricity prices capped?
Normally, business electricity prices are not capped in the same way that domestic electricity prices are limited by the energy regulator, Ofgem.
However, due to the scale of the problem faced by businesses, on 21 September 2022, the Department for Business, Energy & Industrial Strategy announced plans to help cut non-domestic energy bills.
From 1 October 2022 to 31 March 2023, the government will implement a Supported Wholesale Price for non-domestic customers in Great Britain. This is £211 per megawatt hour (MWh) for electricity. A parallel scheme has been established in Northern Ireland, utilising the same support prices.
The level of price reduction will depend on your contract type:
- Fixed price contracts: in Great Britain, if you are on a fixed price contract signed on or after 1 April 2022, including those signed from 1 October 2022, your per unit energy costs will be automatically reduced to the level of your Supported Wholesale Price. In Northern Ireland, it will be applied if you signed a fixed-rate contract on or after 1 December 2021.
- Default, deemed or variable contracts: if you are on a default, deemed or variable contract, you will receive a discount on your per-unit energy costs. The maximum discount between wholesale prices and the Supported Wholesale Price is £345 MWh for electricity, subject to wholesale market developments. Your contract type means that, while your bill will be reduced overall, it is still subject to price changes.
- Flexible purchase contracts: since some of the largest customers are on flexible purchase contracts, the level of their reduction will be calculated by suppliers based on the terms of the contract, as well as the maximum discount of £345 per MWh.
The government will review this scheme three months after its launch, in order to both identify the most vulnerable industries in need, and decide what support will look like after March 2023.
» MORE: What is the Energy Bill Relief Scheme?
How much would electricity cost for a small business?
Based on the Q2 2022 figures from the Department for Business, Energy & Industry Strategy, if a small business were to use 22,500 kWh in a year, it could be facing a bill of £4,734. This is before the standing charge and other fees are taken into consideration.
What about micro businesses?
When it comes to commercial electricity, you are classed as a micro business if you meet just one of the following criteria:
Your annual electricity usage is less than 100,000kWh.
You have fewer than 10 employees, and your yearly turnover is less than €2 million.
Due to this second criteria, most small businesses in the UK would actually fall under the micro-business category.
It is important to work out whether you are classified as a micro business, as there are specific Ofgem rules in place to protect you when it comes to business energy contracts. These include:
- plain, easy-to-understand language in your contract
- greater transparency around the details of your contract, including brokerage costs and expiry dates
- a shortened notice period of 30 days
- a 14-day cooling-off period if you change your mind
- a renewal cap of 12 months if you let your contract rollover.
What about charities and non-profit organisations?
Charities and non-profit organisations are one form of business that may be eligible for the reduced VAT rate of 5%.
As a charity or non-profit, you also won’t be required to pay the Climate Change Levy (CCL).
What is VAT on business electricity?
The standard rate of VAT on business electricity is 20%. However, certain businesses are eligible for a reduced VAT rate of 5%. These include:
- charities and non-profit organisations
- mixed use business premises, where 60% of the energy usage is for domestic purposes
- businesses that use no more than 33 kWh a day (or 1000 kWh a month) of business electricity.
Can you claim the VAT back?
Most of the time, you won’t be able to claim VAT back on your business electricity, or gas, bills. However, you may be able to get a partial refund if you were paying 20% VAT while eligible for the reduced rate for your last four years’ worth of overpayments.