Why is business electricity so expensive? Answered!
New small business owners can be shocked by the additional cost of business electricity prices compared with your typical home electricity bills.
Here are the six reasons why business electricity can be so expensive:
- Business electricity tariffs and levies
- No business electricity price cap
- Demand and capacity charges
- Higher business electricity usage
- Brokerage fees
- Rollover business electricity contracts
Below, our business energy expert Ben Brading has set out a brief explanation of each factor.
Business electricity taxes and levies
Unlike electricity supplied to homes, business energy bills contain two additional taxes levied by the UK government:
- VAT at the standard rate – Business electricity rates incur a value-added tax fee of 20% on all electricity charges. Although this makes business electricity bills more expensive, most businesses are VAT registered and so eventually recover their paid VAT as part of their quarterly VAT returns. Here’s our complete guide to VAT on business energy rates.
- Climate change levy – Businesses pay an additional tax called the climate change levy (CCL) on top of all electricity bills. The climate change levy is currently charged at 0.775p/kWh. For a full explanation on current and future rates, check out our complete guide to the climate change levy.
These two additional taxes are paid directly to your business energy supplier as additional charges on all commercial energy bills.
Note that VAT and CCL are exempted for the smallest businesses. Check out our guide to small business electricity prices.
No business electricity price cap
The domestic electricity market is protected by Ofgem’s energy price cap.
The price cap limits how much domestic electricity suppliers can charge on their out-of-contract deemed rates. The price cap is designed to protect consumers that don’t regularly fix their energy prices.
No such protection is afforded to businesses. Business electricity suppliers can (and do) charge twice as much for their standard variable contracts.
This is the main reason why it’s essential for businesses to regularly compare business electricity rates to benefit from cheaper fixed electricity rates.
Here’s our full guide to the implications of not having a business energy price cap.
Demand and capacity charges
Commercial properties that use a lot of electricity have half-hourly meters which record business electricity consumption every half an hour.
These businesses then get charged a maximum demand charge based upon the highest amount of planned electricity consumed in any given half-hourly period.
The additional charge is to compensate the electricity distribution network operators for the cost of committing to meet this demand at any time.
Businesses will incur a further excess capacity charge if they exceed the agreed maximum demand on their business energy tariff.
Business electricity usage
The average home electricity usage is approximately 3,000 kWh per year of electricity.
It may be an obvious point, but businesses typically consume much more electricity than this. Here’s an indication of the amount of electricity a business will use:
|Business Size||Average Annual Electricity Consumption (kWh)|
|Average British Home||2,900|
Business electricity rates are charged for each kWh of electricity used, which means the average business electricity bill is more expensive.
Rollover business electricity contracts
Rollover business electricity contracts are a unique phenomenon occurring in the world of business electricity.
All business electricity tariffs define what will happen at the end of the fixed term, and this is usually either:
- Expensive, standard variable rates (see above); or
- An unfavourable fixed rollover contract
A fixed rollover contract can be much more expensive than new customer fixed rates available if you switch business electricity suppliers. The rollover contract has the effect of trapping businesses onto unfavourable terms.
Check out our full guide to what happens at the end of a business energy contract.
Many companies use business energy brokers to help them navigate the confusing array of business electricity suppliers and find the best deal.
Unlike home energy comparison, where you can benefit from a simple online switch helping businesses switch tariffs is more onerous.
To cover the cost of helping businesses through this process, brokers will earn a commission typically added as a fee per kWh to your electricity supply contract.