A Quick Guide to Business Energy in the UK
It can be easy to assume that business energy and domestic energy work in the same way. However, there are important differences between the two that you should get to grips with if you run your own business. Read on for more about how business energy works in the UK.
One of many questions you might have when setting up your own business is whether or not you need business energy in the UK.
Business energy can be cheaper than domestic energy, so it might be worth considering it from a cost perspective. However, this will depend on a number of factors, including the size of your business.
Below, we get into what exactly business energy is, how it differs from domestic energy, and how to make sure you are getting the right deal for your business.
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What is business energy?
From the laptops and lights in an office to the ovens and fridges in a restaurant, there are a range of different business activities that would be classed as ‘business energy’ usage. In fact, it is hard to run a business in the 21st century without frequently encountering something that would fall under that umbrella.
Business energy powers your workplace just as your domestic energy powers your home. Many of the suppliers which offer domestic energy also provide business energy. It even travels along the same National Grid networks. However, they are treated as very different products.
Business energy vs domestic energy in the UK
Before trying to get a business energy contract, you should understand how it differs from domestic energy.
Is business energy cheaper than domestic energy? Yes and no.
Your business energy bill may well be more expensive than your domestic bill because of the kinds of tools and machinery you require to make your business work.
Yet, energy unit rates are typically cheaper for businesses than domestic households. This is because businesses can negotiate their unit rate, and suppliers can buy wholesale energy in bulk to cover the estimated usage for the length of a business’s contract.
Broadly speaking, the bigger your business and the more energy it consumes, the lower your kilowatt hour (kWh) unit rate will be.
But energy unit rates are not the only difference in cost. A business will pay VAT at 20%, instead of the 5% domestic energy rate, though some businesses may be eligible for the lower rate.
There is also the Climate Change Levy (CCL), which is charged per kilowatt hour, as well as your standing charge (the price you pay for your energy to be supplied to your business), and a number of ‘pass through’ costs, such as transportation fees.
There are a number of ways a business energy contract will differ from its domestic energy counterpart.
- They are longer. Business energy contracts can last anywhere between one and five years. You won’t be able to switch suppliers until near the end of your contract. So it's important to know your business energy notice periods and end dates.
- There is no cooling-off period. While some micro businesses may be offered a 14-day cooling-off period, i.e. a window to cancel the contract, most suppliers will not give you this option.
- Most contracts are single-fuel. Unlike with domestic energy, you probably won’t be able to get your business gas and electricity supply on the same tariff from the same supplier.
- Fixed or variable tariffs. As a business, you can choose a fixed or variable tariff, depending on what best suits your needs.
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Knowing your rights as a micro business in the UK
According to the government, 95% of all businesses in the UK in 2021 were classed as micro businesses. That means, if you are reading this article right now and you run your own business, it is more than likely it is a micro business. And that’s really important when it comes to business energy.
For business energy purposes, the Office of Gas and Electricity Markets (Ofgem) classes your business as a micro business if it either:
- has nine or fewer employees, and a yearly turnover or balance sheet of less than €2 million (£1.67 million)
- uses less than 100,000 kWh of electricity a year
- uses less than 293,000 kWh of gas a year
If you do qualify as a micro business, you are entitled to special privileges regarding your business energy contract. These include:
- A maximum notice period of 30 days to end your contract.
- The ability to notify the supplier that you want to switch at any time before the end of the contract.
- The contract end date and notice period are clearly visible on each energy bill.
- If you fail to switch suppliers, or sign a new contract with your current supplier, your ‘rollover’ contract cannot last longer than 12 months.
- You cannot be ‘back billed’ for energy you used over 12 months ago if an error is found on your bill and you owe money to your energy supplier.
Business energy and working from home
If you run your business from home, it won’t always be cheaper to move to a business energy contract. You will need to compare your domestic bills with the tariffs offered by business energy suppliers.
You might also not be eligible, as some suppliers will require you to show that at least 50% of your energy usage at home relates to your business.
To try to estimate what percentage of your home energy usage is for your business, it is best to carry out a mini energy audit. Make a note as you go through your working day of when exactly you are using energy for business purposes, and when it is for personal use.
For example, using your computer is a business activity. As is heating and lighting your workspace. Your fridge being on all day, on the other hand, is not. From this you will be able to get an idea of whether you cross that 50% threshold.
Other points to bear in mind when working out whether home business energy is the best option is if you are eligible for the lower rates of VAT and CCL.
To pay the 5% VAT rate on gas, you will need to use less than 145 kWh a day, while for electricity it is 33 kWh.
These are the same usage thresholds to avoid paying the CCL charge.
How to find a UK business energy supplier
When you start looking for your business energy contract, there are certain factors you should make sure to take into consideration beyond just the basic kWh unit rate. These include:
- the fees and costs charged by the supplier on top of the unit rate
- the length of the contract
- the length of the notice period, and any exit fees
- the fuel disclosure of the supplier, and whether it is 100% renewable
- the supplier’s reviews, especially of its customer service
If you want assistance finding a supplier, you could use a business energy broker. They can help negotiate your contract, manage your switch, and help provide advice on energy efficiency and how to cut your usage. You will, however, have to pay a fee for their services.
Alternatively, you can use our business energy comparison tool in order to get a bespoke quote for your business.
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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