How Do Commercial Energy Contracts Work?
Just like with domestic energy, your business energy bill is primarily made up of two charges:
- Unit Cost: This is the rate you pay for the gas and electricity you use, measured in kWh. While this rate is usually fixed, your bills can still vary based on your usage.
- Standing Charge: A fixed daily fee that covers the maintenance of the national grid and the cost of transporting gas to your business premises.
When comparing quotes, you can reduce your bills by finding deals with lower unit costs and standing charges. However, your monthly payments will also be influenced by additional charges and taxes, such as transportation and distribution costs from suppliers, VAT, and the Climate Change Levy imposed by the government.
Types of Energy Contracts
There are five main types of energy contracts to be aware of:
- Fixed Rate: Unit rates are set for the duration of the contract, helping with budgeting and protecting against price increases. Monthly bills will still vary with your energy usage.
- Variable Rate: Unit rates fluctuate with market activity, meaning your costs can go up or down during the contract period, even if your usage remains constant.
- Deemed Rate: Also known as an out-of-contract rate, this is a rolling deal with higher rates.
- 28-Day: A contract for businesses that haven't switched since the energy market was deregulated.
- Rollover: Used when no new contract is agreed upon before the current one ends, typically featuring the supplier's highest rates.
Important Considerations
Be particularly cautious of deemed rates and rollover contracts. If you haven't signed a new contract or renewed your existing one, most suppliers will place you on deemed rates, which are usually much higher than regular rates, or a rollover contract, which locks you in for another year at less competitive rates.
If you find yourself on deemed rates, you can exit the contract by giving your supplier 30 days' notice. However, leaving a rollover contract is much more challenging.
Therefore, it's crucial to know when your business energy contracts end and to negotiate a new deal before that date.