Business energy contract types can have a huge effect on how much your electricity or gas costs.
There are two main types of contract: fixed rate and variable rate. Sounds simple enough so far? Unfortunately, it’s not! It starts to get complicated as soon as you look at the detail. For instance there’s lots of different kinds of fixed and variable rate contracts. To make matters even worse, a fixed rate contract may be subject to variable government charges like the Climate Change Levy which increased by 45% for electricity and 67% for gas in April 2019.
Our guide to business energy contracts below will give you basic understanding of what’s available and the pros and cons of each.
If you haven’t reviewed your energy for a while and aren’t sure of the contract end date you may be paying far too much for your electricity and gas. So our guide starts with the two energy contract types you really want to avoid:
If it’s more than two or three years since you last looked at your business energy contract, and you’re past your renewal date, there’s a good chance your supplier has placed you on a Deemed Rate Tariff. These are rolling, out of contract tariffs which means, unless you do something about it, you could be paying your suppliers most expensive rate indefinitely!
Like the Deemed Rate Tariff, this is a contract that suppliers use when contracts end and no alternative has been agreed. Rollover contracts are usually prohibitively expensive and can lock you into a bad energy deal for years.
Choosing the right type of business energy contract is largely down to what your business wants from its energy. No one wants to pay too much for business energy, so the cost of business energy tariffs will always be a factor. But, on top of cost there are other factors to consider, like admin and the risk of price fluctuations and changes in your energy consumption.
If you prefer to know what you’ll be paying for electricity and gas for the next few years, or so, and don’t mind paying a little more for your energy (because the supplier has built the risk of future energy price rises into your fixed price) then this is the contract for you. The unit price (kWh) you pay is fixed, but your bills do vary according to how much energy you use. Saying that, fixed rate contracts are great for peace of mind and, in terms of admin, are easy on the accounts department! The downside is that if energy prices fall you miss out on the savings and you're still subject to variations in things like energy transmission and distribution costs. Your Energy Check consultant will advise you on the future energy cost implications of this to your business.
These contracts ‘do what it says on the tin’ - energy unit prices vary with the market for the duration of the contract. The unit price you pay on these contracts is often cheaper than fixed contracts, because you’re taking the risk of price fluctuations. If energy prices fall, then you pay less for your business electricity or gas! On the other hand, energy price rises get passed on to you straight away, making budgeting and administration slightly harder work. There are ways we can forecast future electricity and gas prices and your Energy Procurement Expert will present this to you.
This type of contract is usually associated with business electricity contracts. It’s a hybrid of fixed and variable where the unit price of energy is fixed usually at a lower price than you’ll find in a fully Fixed Rate Contract, but costs associated with the transmission and distribution of energy are variable. These non-commodity charges do change in-line with government policy and Ofgem rulings. So, Pass-through is a good compromise if you’re looking for a good fixed unit price for your electricity and are willing to take a risk on the non-commodity charges rising. Your energy saving expert will be able to give you a forecast on the likelihood of this.
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