For most SMEs, energy pricing provides various services and is a major part of the costs that they will face moving forward. Most SMEs typically enter into contracts with suppliers on an “as-is” basis without fully understanding how the price structure works or what may be causing their energy usage and pricing to go up and down each month. This blog will provide clarity to the different ways when pricing is calculated based on several different components, including how products are priced and the market impact of the economy. Many small companies also don’t realise how business electricity rates shift monthly and why energy comparison can help them negotiate better terms.
Energy companies use a variety of pricing formats and terminology that can confuse most small business owners. Although many companies offer low prices, if you look closely, the monthly standing charge may be significantly higher. A small business may also have a variable tariff, and how the variable tariff will be affected by changes in wholesale business energy prices is unknown. Other common terms can also confuse a small business owner, such as “out-of-contract tariffs,” “default tariffs,” and “cost pass-through.”
As many business owners focus on the day-to-day operations of running their businesses, they may miss billing issues or overcharges and will remain on high-priced rollover tariffs simply because they missed a renewal. As a result, they pay significantly more than required for the same energy supply and fail to conduct proper energy supplier comparison that could potentially reduce costs.
Overview of Major Types of Energy Pricing Structures
Small businesses usually have to deal with five major pricing structures. Mastering them will help you choose a plan that best fits your consumption pattern, business hours, and risk tolerance, especially when reviewing commercial energy prices across suppliers.
1. Fixed-Rate Tariffs
A fixed-rate tariff means the price you pay per kWh will stay consistent throughout your entire contract, which is typically 1–3 years. This kind of structure is popular with small businesses because it offers them the following:
• Predictable monthly costs
• Protection from wholesale market volatility
• Simplified budgeting
• Stability of seasons that are not predictable
On the other hand, there are disadvantages to tariffs with set rates. For example, in cases where wholesale rates plummet massively, you are still locked in to a higher rate contract. Additionally, there could be penalties for early contract termination in cases where businesses try to change tariffs in between contracts.
E for Energy assists in comparing the fixed rates of various energy suppliers to ensure that the rates fixed by the business are not excessive, especially when requesting business electricity quotes for multiple-year terms.
2. Variable or Flexible Tariffs
In a variable tariff, the unit rate varies based on the wholesale energy market. This may prove beneficial when energy pricing trends are declining, but a less stable cash flow may be detrimental to a business. Market-driven spikes, especially in winter or due to shortages, tend to escalate costs.
• Have seasonal operations
• Can move energy-consuming processes
• Are willing to monitor market prices
• Can deal with variations in monthly payments
E for Energy analyses pricing trends and usage data to help small businesses decide if they are eligible for a flexible pricing scheme. Many SMEs compare business energy prices at this stage to ensure the market conditions suit their risk level.
3. Time-of-use (TOU) Tariffs
TOU pricing includes varying rates for peak and non-peak times. For instance, electricity might be pricier during daytime working hours and cheaper in the evenings or at night. This arrangement is advantageous for companies that can move operations or energy-intensive activities to off-peak times, for example:
• Pastry shops
• Washers
• Seminars
• Late-opening hospitality establishments
• Minor production
TOU tariffs need smart or half-hourly meters to effectively monitor consumption. E for Energy aids in the installation of meters to provide access to these tariff types and helps businesses conduct proper energy supplier comparison before switching.
4. Pass-Through Charges
A pass-through tariff distinguishes wholesale energy prices from non-commodity expenses, including:
• Charges for the distribution network
• Adjusting expenses
• Ecological taxes
• Fees for transmission
Companies directly pay wholesale rates, and the supplier transparently includes non-energy elements. This framework is appropriate for SMEs that have consistent energy usage and a solid grasp of market trends. Many companies simultaneously look at commercial energy prices to determine if pass-through is cost-effective.
5. Green / Renewable Energy Tariff
Green tariffs consist of energy produced from renewable sources or that is certified by REGO. This type of tariff may have a minor additional cost; however, green tariffs offer businesses many benefits, including:
• a way to develop their sustainability credentials
• how to fulfil ESG requirements
• how to promote and improve their brand image
• how to lower CCL charges in certain situations
As more and more businesses seek to demonstrate their commitment to being environmentally conscious, many will begin using renewable energy tariffs and compare these to standard business electricity rates to determine long-term savings.
Costs Influencing Your Energy Invoice Beyond the Unit Rate
Many business owners concentrate only on the unit price, yet the total invoice contains various other factors that significantly affect the total expense. These consist of:
A regular fixed charge that encompasses the expenses of sustaining the supply network. Even with low usage, the standing fee still applies.
Relevant for companies with significant energy demands, like production facilities or restaurant kitchens.
A governmental tax on the consumption of non-renewable energy. Certain SMEs might meet the criteria for exemptions, yet numerous are wrongly classified and end up overpaying. E for Energy assists in rectifying VAT and CCL categories.
Small scale businesses are supposed to pay only 5% VAT for energy, while others pay 20% because the suppliers are wrongly categorised.
Installation of Smart Meters and AMR Meters can incur an extra cost.
Location-based fees that differ across the UK. Since such factors are concealed in the package price, SMEs are also unaware of what they are paying beyond the advertised unit price, which is why checking business electricity quotes is necessary to avoid surprises.
How to Choose the Right Pricing Structure for Your Business
The choice of the best tariff rate depends on considering the following parameters:
• Average consumption per month
• Peak vs off-peak usage patterns
• Whether operations are flexible
• Type of meter installed
• Contract length preference
• Risk appetite
• Sustainability goals
A business operating during conventional hours might set a fixed rate for consistency, whereas a bakery might find it beneficial to set a time-of-use rate in case it operates at night.
E for Energy carries out a free tariff comparison to determine which tariff is most appropriate for their usage pattern based on their actual consumption, often using energy comparison tools for accuracy.
Common Mistakes SMEs Make When Selecting Tariffs
SMEs are prone to common oversights throughout the tariff selection process that result in higher energy bills. The most frequently made oversights include:
• Remaining on default/renewal tariff contracts
• Selecting the least expensive unit rate while neglecting to consider standing charges
• Failing to meet renewal deadlines
• Overlooking terms and conditions associated with exit fees
• Not reviewing multiple suppliers
• Using older style meters, which restrict the range of tariff eligibility
Lack of knowledge causes small companies to overspend, and all of the previously mentioned errors can easily be corrected if the proper guidance is sought after. Many of these mistakes occur because businesses do not compare commercial energy prices from different suppliers.
How E for Energy Assists Small Enterprises in Reducing Costs
E for Energy offers customised assistance to small enterprises through:
• Providing a no-cost assessment of existing energy expenses
• Analysing concealed expenses and transfer fees
• Evaluating various suppliers throughout the UK
• Discussing reduced business pricing
• Checking VAT and CCL categorisation
• Aiding in the installation of smart meters or AMR systems
• Overseeing switching without any interruptions
• Keeping track of renewal dates to prevent rollover fees
This guarantees that SMEs achieve the most affordable cost-per-unit without having to manage the intricate energy market independently and ensures proper energy supplier comparison is conducted.
Conclusion
Energy pricing models can be perplexing, yet grasping them is crucial for managing company costs. By identifying the distinctions among fixed, variable, TOU, pass-through, and renewable tariffs—and grasping concealed fees small businesses can make educated choices and prevent overspending.
If you doubt that your existing pricing setup is the most effective, E for Energy offers a complimentary assessment and can assist you in transitioning through better business electricity rates, comparing business energy prices, and reviewing updated business electricity quotes to secure a more economical option.