Choosing a new business energy contract is not simply a case of finding the lowest price and signing on the dotted line. The rate you pay matters, but so do the contract length, renewal terms, standing charge, flexibility and the level of service you can expect from the energy supplier.
For a busy business owner or manager, energy contracts can sometimes feel more complicated than they need to be. There are a variety of tariffs, different charges and diverse contract options to consider. The good news is that you do not need to be an energy expert to compare them properly.
A few key checks can help you understand what you are actually being offered and whether it fits the way your business uses energy.
Start With Unit Rates and Standing Charges
When comparing energy prices, two figures will usually catch your attention first: the unit rates and standing charges.
The unit rate is the amount you pay for each kilowatt-hour (kWh) of electricity or gas you use. Your standing charge is a fixed daily amount that applies regardless of how much energy you consume.
Looking at just one of these figures can give you the wrong impression.
Let us simply with an example. One supplier might offer a lower unit rate but a higher standing charge, while another might do the opposite. Which works out cheaper depends on how much energy your business actually uses.
If your premises have high energy consumption, the unit rate can have a particularly noticeable effect on the overall cost. For a business with relatively low consumption, the standing charge may have a greater influence.
The simplest approach is to compare both charges against your actual or estimated annual usage rather than choosing a contract based on one headline figure.
Look Beyond the Price: Check the Contract Length
A low rate may look attractive, but it is important to understand how long you will be committed to it.
A business energy contract can last for several years, with Ofgem noting that business contracts can run for up to five years. Most suppliers will not allow you to switch before the end of the agreed contract period, subject to the terms of your agreement.
Before agreeing to a contract, check:
- The start and end dates
- How long you are committed for
- When you need to give notice
- What happens when the contract ends
- Whether there are any conditions attached to leaving or changing the contract
It is also worth putting the renewal date in your calendar. Knowing when your current agreement ends gives you time to review your options rather than making a rushed decision.
Understand the Type of Contract You Are Choosing
Not every business needs the same type of energy contract. The right option depends on your energy use, budget and how much certainty you want over your costs.
This applies to both your business electricity contract and business gas contract, which are usually separate agreements, even if the same supplier provides both. You may also choose different suppliers for electricity and gas.
Fixed-Rate Contracts
With a fixed-rate contract, you agree to a fixed price for each unit of energy for the contract period. This can make budgeting easier because your agreed unit price does not simply move up and down with changes in wholesale energy prices.
Your actual bill can still change because your consumption changes. In other words, fixing the rate does not mean fixing the amount you pay each month.
It is also important to read the contract carefully, as some agreements may contain conditions that allow rates to change in specific circumstances.
Variable Contracts
A variable contract allows the price you pay for energy to change during the contract.
This can work differently from a fixed agreement and may suit businesses that are comfortable with some fluctuations in their energy costs. However, it also means you need to be prepared for your costs to rise when the underlying cost of energy increases.
The key is understanding how the supplier sets and changes the rate before you agree to the contract.
Rollover or Evergreen Contracts
A rollover or evergreen arrangement can automatically continue your energy supply when your existing contract reaches its end, depending on the terms of the agreement.
For microbusinesses, Ofgem states that rollover contracts cannot be longer than 12 months.
Rather than leaving this to chance, keep track of your contract end date and understand what your supplier will do when the term finishes.
Deemed Contracts
A deemed contract is different from a contract you actively choose.
For example, if you move into business premises and start using energy without agreeing to a contract, you can be placed on a deemed contract. Deemed rates can be more expensive because the supplier has not agreed a specific contract with you in advance. If you move into new premises, it is therefore worth arranging your energy contract as soon as possible rather than simply continuing to use energy without checking your position.
Out-of-Contract Rates
An out-of-contract arrangement applies when your agreed energy contract has ended, and you have not yet agreed to a new fixed-term contract with your supplier.
Once your contract ends, you may move onto your supplier’s out-of-contract rates, which can be higher than the rates available under a negotiated business energy contract.
To avoid paying more than necessary, keep track of your contract end date and review your options before your existing agreement finishes.
Do Not Forget Your Business Size
Your business size can affect the protections and rules that apply to your energy contract, so it is worth knowing which category you fall into.
Under Ofgem’s current guidance, a business can qualify as a microbusiness if it has fewer than 10 employees and an annual turnover or balance sheet total of no more than £2 million. It can also qualify based on energy consumption, using no more than 100,000 kWh of electricity or 293,000 kWh of gas per year.
Small businesses have different criteria. This includes businesses with fewer than 50 employees and an annual turnover of no more than £6.5 million or a balance sheet total of no more than £5 million, as well as businesses with annual electricity use no more than 200,000 kWh and gas use no more than 500,000 kWh.
Knowing your category helps you understand which rules and protections apply to your business.
Consider the Supplier, Not Just the Tariff
Price is important, but it should not be the only thing you compare.
Think about what happens after you sign the contract. How easy is it to contact the supplier? How are bills handled? What happens if there is a problem with your meter or account? Can you get a clear answer when you need one?
These things may not appear in a price comparison, but they can make a real difference to your experience over the length of the contract.
It is worth looking at the energy supplier’s service record, checking the contract terms carefully, and making sure you know how to raise a query or complaint if something goes wrong.
Using a Broker? Understand the Service First
Some businesses choose to use an energy broker or another Third-Party Intermediary (TPI) to help compare contracts.
A broker can help you explore offers from suppliers they work with, but they do not supply the energy themselves. Your actual energy supply contract is with the supplier.
Before using a broker, ask:
- Which suppliers do you work with?
- What services are included?
- How are you paid?
- Are there any fees or commissions?
- Will I see the contract terms before agreeing?
- What happens if I have a complaint?
For micro and small businesses, Ofgem advises checking whether the broker is signed up to an alternative redress scheme, also known as a Qualifying Dispute Settlement Scheme (QDSS).
It is also important to remember that Ofgem is developing a wider regulatory framework for energy intermediaries. New rules are being developed to improve standards around how intermediaries help customers set up energy contracts.
One More Important Point: The Price Cap Does Not Apply
If you have heard about Ofgem’s energy price cap, do not assume it protects your business energy contract.
The price cap applies to eligible domestic standard variable tariffs. Ofgem specifically states that businesses with a business energy contract are not protected by the domestic price cap.
This is one reason why understanding the terms of your own contract matters. Your business energy costs are based on the agreement you enter into with your supplier and the way your business uses energy.
Take Your Time Before You Sign
A good energy contract is not necessarily the one with the lowest advertised rate. It is the one whose pricing and terms make sense for your business.
Before signing, compare the unit rates and standing charges, check the contract length, understand whether the rate is fixed or variable, and find out what happens when the agreement comes to an end. Review your business electricity and business gas contract separately, even if they are with the same supplier.
If you are using a broker, understand how they are paid and what suppliers they work with. And if you are moving into new premises, do not overlook the importance of arranging a contract promptly to avoid spending longer than necessary on deemed rates.
The more you understand before signing, the easier it becomes to select a business energy contract that fits the way your business actually operates.
