How are business energy rates calculated?
Businesses in the UK utilise energy in the form of electricity or gas. This energy must be produced, transmitted and distributed reliably across the country, which requires real-time management by many organisations working at different stages of the process.
The costs within this complex energy matrix, together with external factors such as global politics, war and macroeconomics, define the price of your business energy bill.
In this article, we will summarise the factors impacting business electricity rates and commercial gas prices so that you are aware of what you are paying for, and why this changes over time.
The UK energy market in a nutshell
Wholesale electricity production
Wholesale electricity in the UK is produced from a mix of both renewable and non-renewable sources.
Wholesale gas production
Wholesale gas used for heating purposes is partially produced in UK refineries using LNG extracted from the North and Irish seas, while a lot is imported from Europe through underwater pipes.
Unlike electricity, gas may be stored indefinitely within UK gas storage facilities that are normally replenished prior to winter in case of shortages. However, these facilities are limited, and only a couple of days worth of UK gas consumption may be stored at once.
Check out our comprehensive guide to what goes into your business gas bill.
Business energy suppliers
Gas suppliers operate separately from electricity suppliers, but both purchase their commodities directly from energy producers at wholesale rates. At AquaSwitch, we keep an updated monthly report on energy wholesale prices if you want to keep on top of it.
On top of production costs and external factors, polluting fossil fuel refineries or power plants need to pay premiums to meet their emissions allowance as determined by the UK Emissions Trading Scheme (UK ETS).
The business energy supplier also needs to pay for the costs incurred by the transmission and distribution companies, up to the point where your property’s meter is connected to the national grid and gas pipelines.
This means that the cost to deliver energy (electricity and/or gas) to your property varies depending on where your business is located in relation to energy production.
Each supplier deals with purchasing wholesale energy, transmission and distribution differently and therefore offer different rates and green business energy tariffs, depending on where they source their energy.
Also, being at the interface between the energy supply and businesses, they are responsible for customer support and any other services such as energy audits. AquaSwitch provides a comprehensive business energy comparison service to compare deals on offer from across the market.
Business electricity and gas rates calculation (what’s included):
As a deregulated industry, business electricity and business gas suppliers need to make a profit and so will pass on most of the aforementioned operational costs to the consumer.
A typical business energy bill is paid monthly and usually contains the following elements:
Agreed Unit Fee per kWh: This fee applies separately for gas and electricity and is negotiated directly with the supplier. See our business energy usage guide for a more in-depth view.
It depends on your business’s industry, size, credit rating, location, wholesale energy prices, if a fixed or flexible contract is signed, etc.
For more information, check out our full article on business electricity rates per kWh.
Energy Standing Fee: This fee represents the supplier’s cost incurred by the transmission and distribution companies. Although generally charged separately, businesses can negotiate to pay this business energy standing fee as part of the agreed unit fee.
VAT: Businesses pay 20% VAT on business energy unless eligible for discounts.
Climate Change Levy (CCL): Since 2001, the CCL must be paid by all businesses that consume electricity and gas, with some exceptions like charities being exempt.
What’s the difference between commercial and household energy rates?
The business and domestic energy markets are deregulated, meaning households and businesses can negotiate their contracts with suppliers.
There are, however, some key differences in the rates. For instance, households only pay 5% VAT, while businesses must pay 20%, with some exceptions.
Also, the Climate Change Levy mentioned above only applies to businesses.
However, because businesses tend to consume larger amounts of energy, they tend to be offered significantly smaller unit fees, despite the added VAT and tariffs.
How can I compare business energy prices?
Our energy experts will help your business navigate the market and find the cheapest business electricity and business gas prices available to your company.