Understanding Commercial Electricity Pricing
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Last updated: 20 May 2020
Switching your business electricity supplier can get you a better deal and save you money. Energy costs are one of the largest outgoings for businesses, so it’s wise to know your options and to regularly compare business energy
to make sure you’re getting the best deal. Instead of placing you in a bracket to suit your general energy usage, business energy deals are calculated to fit your exact needs, by taking a few different factors into consideration
How does contract length impact cost?
Business electricity contracts can vary in length from one to four years. As a general rule, the shorter the contract term, the lower the unit price of electricity is. But as with everything, there are always exceptions to this rule.
Having a one-year deal is generally cheaper than having a longer one. This is because your energy supplier
can’t predict future business electricity costs and has to buy the electricity that you will need in advance. Electricity prices normally increase over time, so in a four-year contract your supplier would normally increase the unit cost to cover future price increases.
How is commercial electricity pricing different to domestic?
Commercial energy is impacted by the location of your business. If you are based in the countryside, it will cost more to get energy to your premises than it would if you were in a city. Prices also vary by region
. Scotland has some of the highest energy rates in the UK, while the Midlands has some of the lowest.
Because businesses vary in their operating hours and general usage, energy suppliers find it difficult to predict how much electricity a business will consume in a year, while household users are much easier to predict.
Tariffs can also change daily, because of the way in which energy suppliers buy their power. So, if you accidentally miss your renewal period and are rolled over onto a new contract, you could find yourself paying higher rates than you should be.
What are the different business electricity tariff options?
Energy suppliers offer both fixed-rate and flexible
electricity tariffs to businesses. Fixed rate deals are more common, as they gives businesses protection from fluctuating prices. The disadvantage of this is that prices won’t go down if the wholesale price does.
In contrast, flexible tariffs reflect the market. This means that while you could make savings when prices are low, you could also end up paying more than you would have otherwise on a fixed rate tariff. It’s also worth knowing that some flexible tariffs allow you to switch energy
supplier with only 20 days’ notice.
The following contracts are also available to businesses:
- Deemed rate contract: this is also known as an out-of-contract tariff. It’s a rolling contract with expensive rates arranged by suppliers, for customers with no formally agreed contract. This is to be avoided as it’s usually never a good deal.
- 28-day contract: This is a rolling contract for businesses who haven’t switched since the energy market deregulation came into effect. The unit rates that you’re charged can go up and down.
- Rollover contract: If you haven’t organised a new deal when your contract ends, your supplier will put you on a rollover contract. This automatically signs you up for another year, and the rates that you’ll be charged will be very expensive. This is best avoided, so always negotiate a new contract before your current one ends.
Whether you’re a large or small business, it’s always best to be on a fixed rate contract. This option comes with the least risk, and it makes it easier for you to calculate your usage across the entire length of the contract.
How can your business’s credit rating impact your energy rates?
Business energy suppliers
can select which customers they want to deal with based on their credit history. Suppliers are conscious of the risks involved in supplying gas or electricity to businesses that may not be able to keep up with payments, as business energy is expensive and used in large volumes.
If your business has a poor credit rating, or you’re in a high-risk industry, this can narrow down your options of suppliers and their business energy deals
. Some suppliers will not accept businesses with a poor credit history at all, while some just won’t give you access to their best offers. Suppliers that do accept low credit business may also:
- Charge you an additional premium.
- Ask you for a security deposit.
- Insist that you pay by direct debit (though some suppliers will offer you a discount for this arrangement).
- Ask to install a prepayment meter on your premises.
Suppliers normally offer their best rates to those with a good credit score. Whenever you apply for a business energy deal, the supplier will check your credit rating. Around one in three businesses don’t have access to the cheapest electricity rates as they fall below the minimum credit score threshold.
Some businesses, such as start-ups, may have zero credit history, or a relatively low score. If this applies to you, energy suppliers may be reluctant to offer you their cheapest business energy deals
, as they can’t guarantee that you’ll be able to keep up with payments.