Business energy prices: why are they different from domestic prices?
by James Constant
Business energy contracts are not like domestic contracts, for a start they tend to be fixed price and fixed length, with no cooling off period and no ability to leave early without paying a hefty termination fee. Therefore you have to get your decision right first time or you will be the counting the cost for a long time to come.
The fundamental reason for this is businesses are more volatile users of energy than residential customers, therefore businesses do not benefit from the same ‘certainty’ of usage as domestic customers. This means the business energy market cannot benefit from the same uniform, area based pricing deals you commonly see for consumers. Because businesses use their energy at different times (their profile of demand) and in varied quantities (their volume) energy companies will price them individually according to these characteristics as well as their location and their credit rating.
Unlike with residential customers, these prices are shortlived and are ultimately driven by the market. Unlike in the domestic market there are no future price rise announcements in the business energy market as price changes occur continuously down to every half hour!
The price you pay for your business energy is therefore broadly a consequence of the position of the wholesale market when you strike your deal.
The wholesale market is the name given to the market within which electricity, gas and other energy sources are traded
The market is volatile and the implication for the price you pay can be extreme. It pays to get expert advice in securing the best possible energy deal for your business and for the position of the market.
The wholesale market price is driven by a number of factors, key is the price of oil, this has a specific impact on the UK’s wholesale gas prices because we import around 40% of our winter gas from Europe and many gas contracts in Europe are directly linked to crude oil prices.
Changes in oil prices can take between six and nine months to affect European gas prices and as a result a high oil price period maintains its level for an extended period of time. And therefore the gas price you pay is influenced in exactly the same way.
What about electricity? Well, any change in wholesale gas prices in turn has an impact on wholesale electricity prices in the UK as gas is used to generate around 40% of UK electricity.
Additionally, different energy companies will have differing strategies when it comes to hedging the risk of being caught out by the volatility of prices.
Some are more successful than others. (A hedge is an action taken by the energy company to protect it against loss by making a balancing or compensating contract or transaction). This can, at times, save business customers from direct exposure to the volatility of the market but on other occasions it can bring greater uncertainty.
Also affecting wholesale prices is availability of supply i.e. the availability of power stations to deliver electricity, the cost of coal and the cost of carbon.
Interestingly you may have heard of the phrase ‘vertical integration’, this describes an energy supplier who owns the energy generation capability. If a generation plant they use is not working, the price for the energy they produce will increase and the cost for customers will be driven up.
Ofgem is particularly interested to see statutory accounts published by the big energy companies to further understand the impact of such inter-dependencies.
It is not only energy that makes up the price per kWh you pay for energy in fact wholesale costs account for only 57% of an energy bill. If this is the case, what other elements make up an energy bill?
7% of the bill covers losses, that is the physical cost of the power lost through the inefficiency of transmitting the energy around the country to the customer destination;
A further 15% covers the cost of transportation better known as transmission and distribution, this varies by area of the country within which the destination customer is based.
In simple terms, the further your business is located away from the generator the more you will pay, unfortunately for businesses in the South and South West the impact is the most acute.
A further 1.5% covers other industry charges to manage the system;
Around 3.5% is charged for government initiatives such as the supplier renewable obligation and feed-in tariffs;
Some 8% covers the cost of metering, maintaining the capacity of the wires to cope with demand and meter management, this is usually represented as a standing charge;
And finally around 8% goes in as supplier costs or should that be margins?
So there you have it, huge volatility, a globally traded market, major cost implications from getting the timing wrong and some suspicion that everything is not as transparent as it possibly could be.
What makes up our business energy bill? uSwitch explains…
Small businesses – the engine room of the UK economy
by James Constant
Salvation comes in many disguises
Happily for the UK economy that salvation today is coming from SMEs
The latest Manpower Employment Outlook Survey reveals that whilst the hiring plans for the country’s largest businesses has fallen for the third successive month SMEs are predicting significant job creation.
Mark Cahill, UK Managing Director of Manpower highlighted SMEs importance to the UK economy by saying “we’re now seeing them build their workforce again and becoming an increasingly important source of job creation in the UK”
Whilst the confidence and sheer will of SMEs to succeed and to lead the country out of the doldrums is admirable there are still challenging times ahead. Sadly an SMEs ability to raise their prices whether it be as a service provider, manufacture or retailer is significantly less that the ability for the country’s largest businesses to raise an SMEs cost base, none more so than when it comes to business energy.
With continual rumours of business gas and electricity prices rising across the market there sometimes feels that there is no hiding place. Not only that but staples such as business telecommunications as part of a supply chain could all see costs grow in the coming months. Whilst there is no hiding place from the harsh realities of running an SME in these trying times there is a haven for cost saving at uSwitch for Business.
SMEs are fighting back from the brink of an economic apocalypse but now is not the time to rest on our laurels, we owe it to ourselves to make sure that we are able to invest in growing our businesses and not growing the bottom line of business energy suppliers.
Our engine room may be driving us forward but there’s still room for fine tuning of SMEs to really get the country motoring again and a cost conscious approach freeing us to make investments in future growth is just about the best way we can ensure it.
Here’s to a happy outlook
Happy New Year! But PS, it’s going to cost you, thanks to the VAT rise.
We have been reassured that we are out of recession, we have been advised that the economy is stabilising, some of our major retailers, airlines and other large companies have reported growth in revenue, however, just as things start to seem like they are getting back to ‘normal’, the government hits us with a VAT (Value Added Tax) rise from 17.5% to 20%.
Of course, it shouldn’t come as a complete shock, as we were made aware of the plans when the budget was drawn up last year, but the Prime Minister David Cameron had said post-election, that a VAT rise was not part of their plans. Of all the promises that the government has made since the elections, why is this one of the ones that it has to break, especially when not everyone in the cabinet is in agreement?
The increase took effect at midnight last night, so the opportunity to purchase last minute goods and stock pile at the lower rate has now passed, but how is it going to affect other outgoings such as petrol, gas, electricity and other services?
Well, the good news is that residential energy bills are only subject to a 5% VAT charge, which has not been reported to change, however, the traditional 17.5% VAT which is applied to business energy bills will rise to the new 20%. So how does this affect the average bill?
The average SME (small to medium enterprise) bill may rise from £2,863.72 to £2,924.65 – an increase of just over £60 a year, based on an average consumption of 25,969 kwh per annum.* This figure may seem small to some, however, some business energy users, even in the SME market, use more than double this amount, so their bills will see a more significant increase.
Over the last couple of months of 2010 oil prices started to rise and this directly affected gas and electricity prices in the commercial energy market. Almost all suppliers have seen the price per kwh of both fuels rise by up to 20% in some regions, meaning that bills are already on the rise. The new VAT figure will only cause further strain on businesses, and the cold snap isn’t over yet.
So, the advice from uswitchforbusiness.com is to ensure you are on the correct tariff to suit your business energy needs and where you can, switch your energy provider to ensure that you are getting the best prices in your region and for your usage. Not everyone will be able to change suppliers immediately – business energy users are subject to energy contracts that need to be in the renewal period before new prices, tariffs or suppliers can be discussed, but in the meantime, it is a good idea to get out your energy bills and your contract, check the end date, and be ready to check prices and secure a new contract up to four months in advance of your contract end date. Some businesses, may not be in contracts at all, and can be paying up to 50% more per kwh for energy. This is where the VAT rise will have an even larger impact.
So to save money, or for advice at any time during your contract, contact uSwitch for Business and discuss how you can reduce the impact of the VAT ad price rises on your energy bills.
*based on average kwh for 03/04 profile customers taken from Jan 2010 to Dec 2010. Price calculation based on an average of 9ppu and a standing charge of £25 per quarter.
Did you know smart meters have been around for forty years?
Smart meters have appeared more and more in the news agenda over the last few years, heralded as the latest high-tech bit of kit that’s going to revolutionise the energy market. But did you know that smart meters have actually already been around for forty years?
Half hourly electricity meters, the forerunner of smart meter, have been around in their thousands on the business energy market for many years. They’re fitted to higher consuming business premises and they automatically send electronic meter readings every 30 minutes. They help businesses improve their energy efficiency, and help to ensure the safe running of the electricity network too. They’re tried, tested and proven.
Furthermore the techie people in the old British Gas Research Station of the 1970s developed fully working gas smart meters – a revolution we are still nowhere near to seeing today.
Yet in 2010, whether we’re business or a domestic customer, we are still waiting for smart meters to truly take off.
The vast majority of us still have to put up with estimated bills, sporadic meter read visits, sore heads from climbing over obstacles under stairs to read an antiquated meter just to make sure we don’t pay too much or too little month after month.
The lessons learnt with half hourly meters, the advent of mobile telecommunications and the reduced cost of manufacturing brought about by our global commercial world should all point to an open goal to get them delivered… but we’re still waiting….why??
There are some glimpses of sunshine out there though…there are plenty of innovative businesses in the UK and across Europe building solutions, some of the newer electricity suppliers have put smart metering at the centre of their product lines and some of the big traditional suppliers are waking up to the demands of their customers.
For businesses there is an upside too – with half hourly meters you can be an early adopter of sorts and start getting the benefits of smart metering ahead of domestic customers. If you’re interested in half hourly metering for your business, get in touch with uSwitch for Business.
Robbing Peter to pay Paul – how can small businesses create a financial balance?
The latest idea from Chris Huhne in his efforts to redistribute government revenue is to increase environmental levies and in turn, to potentially cut Income Tax for thousands of people, or reduce National Insurance payments.
This strategy of ‘robbing Peter to pay Paul’ ticks all the boxes in the bid to meet environmental targets, but will increase fuel tax which will affect motorists and travellers directly in the pocket. Indirectly, this reinforces the message to reduce air travel and to embrace public transport, which has obvious environmental benefits, however, for many business travellers and commuters, this continues to fan the flames of the ‘use less, pay less’ battle, which many businesses face on a daily basis.
There is always the option to compare flight and travel costs, and to shop around at the pump for the best fuel prices in the area, but there will be no escaping potential prices rises of up to 30p per litre if the proposals go ahead.
To survive this period of cost reduction whilst increasing productivity and overall revenue, it seems that businesses need to mirror the government’s moves to create their own financial balance. One way to do this is to fix prices where possible - if someone gave you the option to fix fuel prices at the pump two years ago, knowing what we know now, everyone would have jumped at the chance. However now another fuel rise is approaching and we have no choice but to accept it. So you pay more for travel, but where can you offset these extra costs and fix prices to save money? Business energy.
Looking at you business energy contract is one way to save money, and by fixing your rates now, you will protect yourself against inevitable price rises over the next couple of years. Contract lengths can vary from 1, 2, 3 or even 4 years, so there is an opportunity for every business to fix their prices for a period that suits them. The best way to do this is to use an energy broker such as uSwitch for Business. The broker team will advise you of the various contracts and rates available to suit your business energy needs from a wide range of suppliers, and will ensure that you are getting the best deal for your business. The advice is free and they can set up your new energy contract with the supplier of your choice. It is an easy way to save money, fix your prices and have peace of mind that you are not paying over the odds for an everyday product.
Getting bespoke quotes to suit your business needs, rather than off the shelf products is an excellent way to ensure you are only paying for what you need. uSwitch for Business can also help you find the best solutions for your communications, insurance and help with business factoring when it comes to invoicing.
Other approaches to creating a financial balance are: to compare and save on day-to-day business products such as stationery, monitors or software; speak to your product suppliers and ensure they are still giving you the most cost-effective solutions; revisit your marketing strategies – are they giving you a good return on your investment?
By reviewing your financial balance, you will not only potentially find revenue to reinvest, but you will be better prepared for any further impact from government balancing acts, of which I am sure there will be more!
Use less - spend less, or get a good deal for peace of mind?
We’’ve all heard or read the news recently about the ‘Great Energy Rip-off’ and the pressure on Ofgem, the energy industry regulators, to investigate energy prices from the suppliers. In addition to this, energy minister Chris Huhne has been known to talk of his ambition for us to use less energy, to reduce bills as prices rise.
Fine for those who openly ‘waste’ energy, pay higher bills as a result and can easily save by turning off 3 out of the 5 televisions in the house when no one is watching them, but what about small businesses who need to use large amounts of energy, either in manufacturing or for services such as hairdressing etc.? The idea of cutting down their bills by using less energy puts them in a no win situation. Sure, all businesses can assess their energy usage and become more efficient, but only to a point, after which they rely on getting a good deal for their energy usage without it impacting on their daily business output or performance.
With threats of energy prices rising as the government plans to cut carbon emissions, the best thing to do is to find the best deal at the time to suit your business energy needs.
The good news is that although the business energy market is not as closely regulated in the same way as the domestic industry, business suppliers purchase their energy differently, and can track wholesale rates more closely. This is why price changes are more frequent, so when you are in your renewal period looking to secure a new contract and you find a good deal, secure it. But how do you know you are getting the best deal to suit your business energy needs?
By sending your bill to uSwitch for Business, and giving us a few details about your company, our business advisors can understand your energy usage and quote you the rates from multiple energy suppliers, including household names such as British Gas, ScottishPower and npower. That way you can be sure you are getting the best deal available at that time to suit your individual energy usage, and to give you the peace of mind that you can continue to use the energy you need to use without worrying about paying over the odds, leaving the government to wrangle over the price wars.
- Government energy plans unveiled by Chris Huhne (telegraph.co.uk)
- Chris Huhne’s efficiency drive to turn wasteful houses green (guardian.co.uk)
Why choosing your energy supplier is like choosing your annual holiday
Hurrah! The summer holiday period is finally here…a chance to take some time away from the office, relax and recharge the batteries.
I booked my summer holiday to Spain the other day, and really noticed this year how much the prices have risen and started to think more and more about what I was getting for my money.
Of course, those of us who go on traditional beach holidays all expect the basics – sun, sea and sand; much like the way we expect a blue flame and a flicker of light when we switch on our gas or electricity. However, you wouldn’t book a holiday without checking out what you are actually getting for your money would you? For instance, what is the hotel like? How good is the service? The food? Are there any hidden extras that you may be expected to pay for ?
Turning this analogy to energy made me think about how choosing your energy supplier comes with similar considerations: what is the customer service like? Can I manage my account online? Can I get a free smart meter installed for accurate billing? Whilst price is the main driver for many people when choosing their energy supplier, the secondary drivers can often be just as important. And just like your holiday, sometimes it pays to spend a little bit more to get the extra benefits available.
But this doesn’t just apply to your domestic energy; the same considerations apply to business energy customers, where fixed price contracts make it even more important to ensure you are happy with the whole package you are signing up for.
For many companies, partnerships and even sole traders, the summer months can be a boost for business, for others, it can be a slower period that brings the opportunity for some housekeeping. And whilst no-one wants to think about the weather changing too soon, one of the best ways to prepare for the change in seasons is to re-assess your business energy bills. It is a time when demand is higher, and bills inevitably rise, and is also an ideal time to check when your energy contract is up for renewal - don’t go away and risk missing being rolled into a higher priced contract.
So why not take some time before you jet off to foreign shores, to dig out your energy bill, ensure you are getting the best rates to suit your business needs, and you might even save a tidy sum that you can put towards those little holiday luxuries… sangria anyone?
- The draft Energy Bill: a five-minute summary
- 60% increase in business energy costs as average turnover falls by 6%
- Business week in brief: 11th May 2012
- Ed Miliband and the Queen talk energy
- Interview with Steve Fitzsimons of new business energy supplier, Hudson Energy
- Business week in brief: 4th May 2012
- The see saw of corporate profit
- Business week in brief: 27th April 2012
- EDF Energy’s Business Customer Commitments: four key pledges
- Businesses buck the trend when it comes to smaller energy suppliers