It had been in train for years but in May 1999 the UK energy market changed radically. Ever since that point all customers, domestic or business have been able to change suppliers.
Approximately 19 million customers have taken advantage of this market liberalisation, and as a result, UK energy prices have fallen by 13% in real terms.
For business customers, switching energy suppliers can make a huge impact on cutting costs – the difference between profit and loss, perhaps.
But according to Ofgem, many businesses haven’t been switching and have missed out on significant cost savings.
There’s no need to get bogged down in the details – our aim in this guide is give you a basic overview of the business energy market, an understanding of what makes up your business energy bill, and an appreciation of the mechanics of switching suppliers, so you can make a real dent in your business energy costs.
Business energy made simple
The UK energy market comprises of three parts:
- The Suppliers – these are the companies that supply and sell electricity and gas. From a customer perspective, the suppliers are the most important group as these are the only tangible contact a customer will have with the energy industry. As a result they are rarely seen in a good light, this is often unfair.
- Distributors – these are the companies that are responsible for getting the energy to the end user. They look after the pipes, wires, cables and meters. Suppliers have contracts with distributors to provide these services and all of these costs are included in the price the supplier charges the customer.
- Generators – these are the companies that source and generate the energy. Historically, they used to rely almost exclusively on coal, but over the years the fuel mix has changed considerably, and now there’s varying proportions derived from gas, nuclear and sustainable sources. Many energy suppliers are also energy generators.
The wholesale energy market
The wholesale market is where energy suppliers buy energy to retail to their customers.
On average half of business customers’ bills are made up of wholesale energy costs, which are volatile and can move day-by-day in gas an every half an hour in electricity.
Changes in wholesale prices have an immediate and often marked effect on business energy prices because the behaviour of businesses is far less uniform than for a domestic customer and so suppliers price on a contract by contract basis and are exposed to daily volatility.
Domestic energy demand is more predictable. So while domestic energy price rises and falls happen rarely and are a big event, business energy prices can, and often do, rise and fall on a daily basis.
To find our more about the differences between domestic and business energy visit our guide.
The business energy contract
It’s worth noting that although the business energy market is volatile, businesses are protected from at least some of this volatility because contracts are generally signed for a fixed rate over a fixed period.
Many customers prefer 12-month contracts, but by signing up for a long-term contract, you can fix your energy prices for as long as five years. You’ll pay a premium to start off with, but with the upward trend in business electricity prices, you’ll almost certainly see savings in the long run. Whether you go for a short or a long-term contract ultimately depends on how risk-adverse you are.
When you move to new premises, you’ll pay deemed rates and if for any other reason you don’t have a contract in place, you’ll pay out-of-contract rates. These are an expensive position to be in – out-of-contract rates are double in-contract rates, so it’s a situation avoid at all costs.
Ultimately, as a business customer, a series of elements affect the price you will be offered:
- your location,
- your energy usage,
- your credit score,
- your business type,
- the length of the contract,
- the supplier you choose.
Items on your business energy bill
The Unit Rate and Standing Charge
The two most significant elements of the energy price that you see on your bill are the standing charge and unit rate. But while most business electricity tariffs have a standing charge, not all gas tariffs do.
Getting the lowest unit rate doesn’t always mean you’re paying the lowest possible price for energy. It depends on how much you use. For heavy users, a low unit rate is vital, but for relatively light users, a low (or no) standing charge and higher unit rate might be preferable.
Climate Change Levy
The Climate Change Levy (CCL) is a government levy added onto your bill paid on all non-renewable energy you use.
This is charged at 0.541p per kWh of business electricity, though businesses that use less than an average of 33 kWh of electricity a day are exempt. For gas, the CCL is 0.188p per kWh of gas used, while businesses that use less than an average of 145 kWh are exempt.
Our Climate Change Levy section will help you with this and also provide access to those helpful exemption forms.
VAT is charged at 20% on business energy bills, although it is only 5% for businesses with a domestic or residential element such as care homes or caravan parks, or for those using an average of 33 kWh of electricity or 145kWh of gas a day or less.
Some business premises are served by independent gas transporters (IGTs) rather than Transco.
If your business is one of them, you may find that prices are higher because the gas supplier will have to pay the IGT a fee to use their pipes at a higher rate than is charged by Transco. Unfortunately, if you are served by an IGT, the choice of gas supplier can be limited too.
Smart meter charges
Some energy suppliers charge for having a smart meter. Even with this charge, though, a smart meter can make good financial sense. They can help you be more energy-efficient, improve your cashflow and reduce costly administration caused by billing errors.
Traditional business electricity and gas meters
Energy meters aren’t the most exciting subject, but understanding yours can make a real difference to your cashflow.
While there are a lot of different kinds of business electricity meter, there is only one standard type of business gas meter – though it can be serviced in different ways, depending whether Transco or an IGT feeds it.
Having the right meter for your business can make a real difference to getting the best tariff. But whatever type of meter you’re using it’s important to take readings regularly rather than rely on estimates.
If you do allow your business to be billed on estimates, you could be paying too much or too little for your business energy, which can have a negative effect on cashflow and bring about the dreaded spectre of back-billing. See our dedicated back-billing guide for more help on this and visit your current supplier page to understand their policy on back-billing. Whatever it is, counter its impact by submitting regular meter readings to your supplier.
Smart meters are a new generation of electricity meter that provide precise, real-time measurements of energy use.
They are gradually replacing all types of traditional metering systems and are subject to a planned mandatory rollout to small businesses by 2019, whilst large businesses must have them by the end of 2014.
Smart meters send information on your energy usage direct to your supplier, so you don’t get bills based on estimated readings.
As well as showing accurate energy consumption, some smart meters come with software that provides data on how much your energy is costing, so you know exactly your business energy spend on a day-to-day basis.
They can help your business save money by encouraging energy efficiency, introducing flexible tariffs and, by eliminating estimates, help avoid the negative effect on cash flow caused by under or overpaying.
Switching business energy supplier
Business energy contracts run to fixed terms, both periods and prices, as a result your business energy contract regularly comes up for renewal. However it is important not to wait for your contract end to act, indeed by that point you could be tied into a rollover deal for a further 12 months on unattractive prices. See our guide on rollover contracts and also visit our dedicated supplier pages to understand their policies and the pitfalls of missing your termination deadline.
For most business energy customers price will usually be the first consideration, but other service and supply factors can also be equally important, such as:
- online services;
- green or renewable energy;
- smart meters;
- account management options;
- multiple premises;
- when you use most of your energy;
- customer service.
It pays to speak to an independent energy broker or comparison site like Business Juice. We are able to compare prices and services from the full UK supplier market so you can be sure you’re getting a good deal.
Not only does it save you a lot of time in terms of finding rates and the accompanying paperwork, but the savings can be significant too.
Even if you decide to remain with your existing supplier we can ensure you get the best deal from them.
If you do decide to switch, your current supplier can object, but only for specific circumstances which will must be set out in your contract. Commonly these are:
- being in debt to your supplier;
- still being in a contract;
- the new supplier not applying to transfer all meters in your premise at the same time
You can agree a contract to switch as early as six months before your contract ends however you will not be able to switch supplier until your existing contract has ended.
But whilst it isn’t essential to act that early – although we would recommend it – it is important that you don’t get rolled over. If you don’t leave plenty of time to cancel your business energy contract before it’s due to end your energy supplier will roll you over on to a new one, resulting in an inflated price for 12 months.
Individual suppliers have different rollover and termination policies. To understand your contract please visit our dedicated supplier pages for all the information you need to ensure you’re not trapped in an uncompetitive contract simply for not taking control of your energy needs.
Act early, act decisively, understand your obligations under your existing contract and ensure that to avoid unnecessary time and effort on your behalf to use Business Juice to deliver the perfect contract for you time and again.