How to Choose a Business Energy Contract in 2023

Cutting energy costs is the simplest way to make your business profitable, but it’s easier said than done.

Your business energy contract becomes a deciding factor, and there are more options than just the common fixed or variable energy contracts.

The confusion around a commercial contract can result in selecting the wrong deal which can negatively affect your revenue.

To help, we’ve put together this guide where you will learn:

• The different types of business energy contracts and their pros and cons
• Internal and external factors affecting contract rates
• Average business energy contract rates in the UK
• How a business contract differs from a domestic energy contract
• Important considerations when selecting a business energy contract

With proper research, review and analysis, your business will avoid an inefficient deal and be on the right path to keeping your energy costs as low as possible.

There are the following different types of business energy contracts:

• Fixed Energy Contracts
• Variable Energy Contracts
• Out-of-contract Tariff
• Flex-Approach Contract
• Deemed Rate
• Evergreen Contracts
• Blend and Extend Tariffs

Let’s take a closer look at each contract type and their pros and cons.

A fixed energy contract operates under a fixed tariff per kilowatt hour (kWh). They are also known as retail energy contracts. The unit rate and standing charge remain fixed for the entire term, and your bills vary depending on how much electricity and/or gas you use. The contract is hassle-free, competitive, and does not need constant monitoring. You should compare the market of fixed contracts before selecting a supplier.

Pros

• Rising market prices won’t affect you
• More business energy deals to select from
• Cheapest type of contract

Cons

• An exit fee if you decide to leave early
• Automatic rollover at the end of the contract can make it expensive
• Falling energy prices won’t benefit you

These business electricity contracts have a variable rate based on current market activity. If the market price increases, you’ll have to pay more; if the price of electricity drops, you pay less. Calculating bills based on usage is difficult in this case, as the prices keep changing.

This contract benefits businesses that are opposed to risk; falling market prices are good for their fortune. Regardless of the terms and conditions, variable energy contracts need regular monitoring and planning. It’s typical to seek the support of a business energy consultant to manage a variable contract on your behalf.

Pros

• No exit fees
• No lock-in period; leave when you want
• Switch contracts whenever you want
• Save money during low market prices

Cons

• Market prices usually rise more often than they fall
• Constant monitoring may be difficult
• Budgeting becomes difficult due to changing bills

In cases where your contract ends before you arrange a new one, you will most likely end up with an out-of-contract tariff. out-of-contract rates are higher than a fixed-term contract and are the most expensive. However, despite their cost, they usually have the fairest of contract terms and extra regulatory protections in addition to a 28-day notice period, so you can easily switch to another contract.

Pros

• Easily switch to other contracts
• No termination fees
• Extra regulatory protections

Cons

• Expense

If your business is of a significant size you may want to consider purchasing energy in bulk ahead of time.

With a flex approach contract aka flexible energy contract, you can capitalize on advantageous wholesale rates by procuring energy in advance for future months or years, typically during low costs periods.

This gives you clarity on the cost you will incur when you consume that energy supply.

How does it work?

Flex approach contracts work by paying a partial sum of the contract, and the market rate decides the remaining sum. Typically, you fix the non-commodity charge and then buy the actual commodity element. For example, say we buy a customer electricity today at a hypothetical current market price of 15p per kWh; the commodity cost is 15p. But the non-commodity typically adds 12-15p extra onto the cost, so they pay 27-30p per kWh with everything included.

However, there are risks, as you may have already purchased energy at a rate that could be higher than future rates if they continue to drop or if you are caught out of contract when energy prices are much higher.

Pros

• Cost-effective
• Some degree of planning your energy costs at the fixed amount you bought in bulk

Cons

• Requires continuous monitoring and advanced knowledge about market trends
• Higher degree of risk

Deemed contracts are similar to out-of-contract tariffs with 28 days’ notice. Although, the difference is that they are provided by business energy suppliers when you move to a new premise and don’t have a contract in place yet. Suppliers aim to extract as much money as possible from you through a deemed contract. Therefore, if you wish to save money, we advise finding a new energy supplier/ business contract as soon as possible.

Pros

• Easily switch to other contracts
• No termination fees
• Extra regulatory protections

Cons

• Expensive

Evergreen contracts (also known as roll-over energy contracts) are contracts where once their term ends, the contract automatically rolls into a new contract for another year. Unfortunately, the new contract can have higher fees, but the current supplier may offer you blend and extend terms to try and retain your business.

 Pros

• Easily sorted payments as staying with the same provider.
• Hassle-free as not looking for a new provider.

Cons

• Business energy prices are usually higher than the previous year.
• Termination fees for leaving the contract early.

This type of contract allows you to extend your current business energy contract with your supplier. Consequently, your business energy supplier may reward you with discounted prices for this extension. Blend and extend contracts work best if you’re satisfied with your current supplier; however, they may not be the most competitive rates.

Pros

• Royalties or discounts on your current plan
• Easily sorted payment as staying with the same provider
• Hassle-free as not looking for a new provider

Cons

• Missing out on contracts with cheaper rates
• Risk of increasing contract length at an uncompetitive market rate

Below are comparison tables to estimate the business contract energy rates for UK businesses for electricity and natural gas, respectively (assuming 300 working days).

Average Industrial Electricity Cost:

Average Industrial Gas Cost:

Due to the longer contract lengths and lack of cooling-off periods it is crucial to pick the right contract for your company. Here are some key considerations that will help you make an informed decision:

Usage Bandwidths

Bandwidth is defined as the maximum usage with a given term. Knowing your bandwidth helps you predict your monthly final bill and budget accordingly. Therefore, you must buy a contract covering your usage to avoid getting a higher energy bill than expected. This is achieved by performing an energy audit and reviewing your annual consumption.

Long-Term Commitments

As business energy contracts operate on a long-term basis you have to be extremely careful on what you agree with a supplier. An inefficient long-term commitment can be costly as you might not be able to switch for a considerable amount of time, or will have to pay a penalty to access better deals as the market changes.

Remember to consider your existing sites and their situations. For example, it’s advisable to try and get a contract length that aligns with the length of your site leases. This is because you don’t want to sign a long-term deal if your lease expires and cannot renew, and therefore would have to move site which will have different energy requirements and you would potentially be consuming different amounts to what your capacity in the contract stipulates.

Calculate your Energy Consumption

By taking regular meter readings and producing an energy report you obtain more precise information on your energy consumption. Knowing the amount you use will help to negotiate when receiving quotes from suppliers

Capacity Scheduling

Capacity scheduling is essential for maintaining an adequate supply of electricity for your sites when demand is high and you need to consume more energy than your averages, such as peak usage in high demand periods. Striking a balance between ensuring availability when required and avoiding excessive costs is vital. In situations where electricity demand is low, having an excessive capacity could result in increased expenses. Therefore, understanding your peaks and troughs and working with suppliers so your contract can be tailored to this is important.

Material Changes

Be mindful of the material changes to your business and sites.  These are typically equipment, personnel, new business premises, etc. The reason why you need to consider these changes is that any increase or decrease in the above will have an impact on your energy consumption and this impact may not reflect what was agreed in the capacity of your energy contract. Depending on your contract, a significant change in consumption can result in a change in energy price. Check the flexibility of the contract and how much volume can be added or removed before a price change is incurred. Therefore, consider the future and if you expect any consumption changes as planning these changes will save you from unexpected hidden expenses.

Understand the Termination Fees

You should always consider different termination fees offered in various contracts. These fees are often a percentage sum of the total annual cost or a flat fee. Choosing a contract with a low termination fee is usually the best choice. It may be that some competitive contracts have higher termination fees as that cheaper rate is based on a very limited amount of capacity. All these little factors have to be carefully reviewed when making a choice.

Hidden Fees and Contract Language

Even if the contract seems lucrative at first, ensure that there are no hidden fees. Check the contract language and re-read your current contract to see what you’ve already agreed. Then you can compare it to the contract language of your prospective contracts.

Timing

The sooner you act, the more time you have before your existing contract expires, and the better the deal you’ll find. As soon as you see a good tariff, it is vital to inquire about switching to have a plan in place for when your existing contract expires. Waiting until the last day of your plan’s term might result in higher market prices or increases in supplier rates. This is due to not giving yourself enough time and therefore being in greater demand for a new deal, causing you to miss out on a favourable offer. Additionally, delaying the switch could lead your current utility supplier to enrol you in a rollover contract, which may not be as advantageous.

Understanding your needs

When considering what energy contract to take it is important to establish your requirements. Do you prefer stability and predictability with a fixed-term agreement? Are you willing to take a risk with a reduced price but on a variable deal? or are you looking to switch to environmentally friendly suppliers to enhance your business’s green credentials? Having a clear understanding of your preferences will help you identify which contract to select.

In-House or Outsource

Deciding if you want to procure your energy using your own in-house resource or if you want to outsource your energy procurement is important. This will determine the amount of time you wish to dedicate to selecting an energy contract.

Using an energy broker will take the stress and time out of finding the best deal as you deal with one single point of contact instead of multiple suppliers and also gain access to different supplier rates due to their relationships in the energy market. On top of this , brokerage firms are business energy consultants that will help you understand your energy management and offer invaluable advice when selecting a deal.

Relationship with Existing Supplier

Consider the relationship you currently have with your existing supplier. Are you happy with their level of service? Have they been flexible and accommodating to your needs? Energy companies are eager to retain customers, and you may be able to negotiate a favourable deal with your commitment to staying longer if you are happy with your current service and relationship.

Market Conditions

In a volatile and ever-evolving energy market, this can influence a business energy contract dramatically. The rate at which the market is changing will create another factor in terms of how flexible your contract is in relation to marketplace changes. For example, a more expensive rate might be a better deal if you are fixed on it and know that market prices will soon supersede this in the future and give you a saving. Or perhaps you are expecting the market prices to drop, and therefore a variable contract could be the best choice.