Which Factors Affect Business Electricity Prices?
Business electricity prices – what affects your bill?
Business electricity rates often fluctuate. As a consumer, this can be incredibly frustrating, as it’s far too easy to be stung by a high bill – especially if you use variable business electricity tariffs or if you’re an SME with little financial flexibility.
Although it is irksome that business energy prices go up and down, there are many contributory factors that affect the price of business electricity.
By getting savvy about why business electricity rates change, you can arm yourself with the knowledge necessary to predict as and when this is going to happen. This is why we have put together this electricity for businesses price guide to show you what affects your companies electricity prices.
Do businesses get cheaper energy?
Technically, yes! The rate per unit for business customers is typically cheaper than domestic customers. This is because energy suppliers will often offer businesses lower rates per unit because they will buy more energy in bulk. The average electric variable unit rate for a UK domestic household was 19 pence per kWh in 2021. This compares to an average rate for a business customer of 15.08 pence per kWh.
A further breakdown of average business rates for electricity can be found below:
- Very small businesses: 17.99 pence per kWh
- Small businesses: 16.25 pence per kWh
- Medium businesses: 13.22 pence per kWh
- Large businesses: 12.92 pence per kWh
- Extra large businesses: 11.77 pence per kWh
Although businesses typically get cheaper unit rates, the energy bills for businesses are often considerably higher because they use more energy.
How does the weather affect commercial electricity prices?
It may seem like a peculiar concept that weather can affect your business electricity rates, but it does have an impact.
Your business may have experienced power cuts during large storms and other types of severe weather. This indicates that atmospheric conditions are causing damage to power lines and distribution systems – all of which have to be paid for to be repaired.
This is not as much of an issue for one-off events, however, prolonged destructive weathering can incur massive costs for business energy suppliers which are then filtered down to the consumer.
In addition, extreme temperatures can drive up your commercial electricity rates as you are likely to consume more. When it’s too cold, you turn the heating up, and when it is too warm, you turn the air conditioning on. The more you consume, the higher your electricity bills are, so it’s worth looking into energy efficiency tips ahead of peak summer and winter temperatures to lessen the blow.
However, the impact of weather is not always entirely detrimental. High amounts of rain and snow can increase the amount of power that’s generated by hydropower stations like Swansea and the new tidal plant that is to be built off the Scottish coast.
How does electricity generation affect business electric prices?
Concerning fuel itself, electricity prices are affected, like any market, by supply and demand. Businesses began to take an interest in becoming more environmentally friendly when 2020 climate change targets were announced by EU leaders in 2007.
As pre-emptive strike, businesses began to search for green business energy prices and tariffs.
This sudden demand outweighed supply and very few suppliers were able to provide green energy. As a result, many came to the realisation that they could not yet afford to follow this ambition.
High demand coupled with the limited amount of clean power generated meant that green business electricity rates soared and only the largest organisations were able to afford the luxury.
In recent years, the energy mix has become much more diverse and more electricity than ever before is being generated by renewable sources which means that the cost of this type of energy has decreased.
Regarding more conventional sources of business electricity, we all know that there is a limited supply of crude oil and other fossil fuels left worldwide. It’s estimated that at current rates of production (2019), oil will run out in 53 years, natural gas in 54, and coal in 110. These fuels took over 66 million years to form and we have consumed them in less than 200 years. This suggests that fossil fuels are unlikely to make a comeback and business electricity prices for this fuel type are most definitely going to increase.
Read our 5 benefits of being an eco friendly business for reasons why going green can be good for your bottom line.
How does infrastructure affect business electricity rates?
Each business energy supplier has power plants that incur a range of costs which affect your business energy prices. These costs include maintenance, operating costs and the construction of the power stations themselves.
If the cost of these overheads increase, then so could your business energy bills.
Price rises may also occur in order to fund expansions or to cover internal costs that may impede on profits.
How do energy market forms affect business electricity prices?
New industry regulations on energy efficiency and climate change instilled by governing bodies such as Ofgem and the EU require Britain’s largely outdated energy infrastructure to be replaced – This is going to cost a lot of money.
The objective of the electricity market reform is to assist in decarbonising our electricity supply, improve the security of the electricity supply and to eventually minimise the cost of energy to consumers – this includes company electricity prices.
The energy market reform has been legislated by the Energy Act 2013 and will include the introduction of two new reforms to the energy market…
The Contracts for Difference reform (CfDs)
This energy market reform will support investments that are made towards low carbon sources of energy and provide cost-effective price stabilisation by reducing consumer exposure to unpredictable wholesale electricity prices.
Changes to the energy market include:
- Low carbon generation projects will have to apply for a CfD. Projects may even have to compete in an auction in order to receive a contract.
- CfDs will require generators to sell energy into the market as usual but, to reduce exposure to changing electricity prices, they will provide a variable top-up from the market price to a pre-agreed ‘strike price’.
- At times where the market price exceeds the pre-agreed strike price, the generator is required to pay back the difference which will protect both domestic and business electricity consumers from over-paying on their bills.
- The payments to be made to generators will be calculated and paid out by the Low Carbon Contracts Company. The cost of CfDs will be met by consumers via the supplier obligation, a levy on electricity suppliers.
The Capacity Market
The Capacity Market is a little simpler to understand. It is a type of insurance policy that protects our electricity supply. This opportunity will be offered to all new and existing power stations and electricity storage facilities with a predictable revenue stream.
The cost of the Capacity Market will be met by consumers via the supplier levy on electricity suppliers. However, it will be minimised due to the competitive nature of the auction process which will ensure the lowest cost provision of capacity to meet the level of security of supply determined by the Secretary of State.
In return for this revenue, providers have a responsibility to deliver energy when needed to keep the lights on, or face they will incur penalties.
How do world events affect business electricity rates?
Unsurprisingly, world events affect business energy prices too.
If a war or natural disaster occurs in a country that produces gas and oil, this is likely to affect their ability to produce and transport fuel. This means that demand is higher than the initial amount of supply which creates more competition for the resources available, leading to business electricity price increases.
Events such as these can affect the price of business electricity in Britain somewhat more than other nations due to the fact that, since 2004, we have used more gas than we have produced which has increased UK demand for imported fuel sources.
This is why keeping an eye on world events can help you identify when to prepare for and expect business electricity bill increases.
Are business energy prices going up?
From October 1st 2022 the UK government has introduced the Energy Bill Relief Scheme that will give business owners financial support with their energy bills for six months. However, this is not a cap on prices. Instead of capping rates, limits will be applied to the wholesale price that suppliers pay to generators for energy. The savings made by the suppliers will then be passed on to business owners by a cut in the wholesale price per unit.
Until 31st March 2023, suppliers will pay no more than £211 per MWh for electricity and £75 per MWh for gas. This is known as the baseline wholesale price. The amount you save will be dependent on the type of contract that you are on and the wholesale price per unit that your supplier charges you when you signed the contract. You can find out how much your discount will be on the government website.
How do I reduce my business electricity bills?
At Exchange Utility, we pride ourselves on being able to provide up to date expertise on how to reduce your business electricity bills, we recommend the following:
- Get in touch with an Exchange Utility business energy expert and review your business electricity prices and contracts. You may be using a tariff that is unsuitable which will lead to higher costs. Free Phone 0800 9777 000 or grab a recent bill and compare business electricity online here
- Research and implement energy-saving measures: This is a fantastic and cost-effective way to save your business money as some strategies can be implemented for at little or no cost. You can find a wide range of business energy consumption reduction advice on our blog to help you in achieving this.
- Stay energy savvy! If you are on a variable or flex tariff, then it is extremely important that you keep an eye on current affairs as they directly affect what you could be paying for your business electricity contracts.