Given fluctuating energy market dynamics, rapid shifts in supply chain, and volatile energy prices, business owners are often pressured to make smarter choices about their energy plans. Finding the right commercial energy provider who aligns with your business’s energy needs is tricky and requires a lot of research due to the complex nature of the energy market. There are diverse energy suppliers in the UK offering varying energy tariffs. So, it is crucial to have an understanding of fixed and variable energy tariffs, as they can directly impact cost control, risk exposure, and business stability in the long run.
To effectively meet the evolving market dynamics and stand out in the competitive energy industry, electricity providers are diversifying their tariffs. If you, as a business owner, are aiming to remain resilient and stay aligned with emerging trends, understanding the difference between tariff structures and what energy suppliers are doing to tailor them has become pivotal.
Before deciphering the difference, you might be aware of what energy tariffs are.
What is an Energy Tariff?
An energy tariff is the pricing structure that determines how much you pay for the energy you consume. Energy tariffs are often mixed with energy rates, however, both come in distinct roles. Energy rate simply refers to the price per unit of electricity used, while energy tariffs include the price per unit rate and standing charges, largely impacting your final bill.
A Look into Fixed Tariffs and Their Predictability
As the name indicates, these tariffs refer to a set price per unit (kWh) of electricity for the duration of the contract, which typically ranges from 1 to 3 years. Remember, a fixed tariff means the cost you pay for the electricity you use is fixed, not the bill. The final bill is calculated based on the actual energy consumption. How choosing fixed tariffs can help your business:
- You pay the same unit rates regardless of market fluctuations, protecting you from price shocks. They are easy to manage, and you can forecast your finances.
- It brings you peace of mind. No matter if the regulatory body is increasing the energy prices or your commercial energy provider, you’ll still pay the same rate you agreed on.
- No exposure to unanticipated price hikes, driven by geopolitical disruptions, global energy crisis, wholesale market fluctuation, or seasonal demand.
- Every silver lining has its cloud. Nothing comes without its merits and demerits. The same is the case with fixed tariffs. Undoubtedly, they protect your business from price hikes and other risks. There are some potential downsides.
- If energy prices drop when you are on fixed tariffs, you might end up overpaying. You might lose the opportunity to save on cost as you are locked into fixed terms.
- To hedge against future market fluctuations and price spikes, some energy providers in the UK offer slightly higher prices than the current market conditions.
If you are on a fixed-rate contract, you are required to pay an exit fee when ending the contract. However, Ofgem rules that your energy provider cannot charge you an exit fee if you switch within 49 days of your contract end date. Fixed tariffs offer stability for business, helping in minimising risk exposure and protecting from price hikes. However, not every solution fits all businesses. It is best for small-to-medium enterprises (SMEs), businesses with inadequate risk management practices, and budget-sensitive companies.
Insights into Variable Tariffs and Their Accountability
A variable rate tariff is usually a standard variable tariff or the supplier’s default rate. It simply means your unit rate and standing charge may increase or decrease based on certain circumstances. If the cost of the wholesale energy market fluctuates, the energy supplier might also change the price you pay for your energy. This price fluctuation means your monthly bill may vary if you are using the same amount of energy. Choosing a variable rate tariff can help your business in the following ways:
- If the cost of wholesale energy drops, the price of variable tariffs also falls, enabling you to benefit from lower prices.
- They offer more flexibility, as you do not have to pay exit and switch anytime.
- Standard variable tariffs are protected by an energy price cap, limiting how much your utility provider can charge you for the electricity or gas you use. Ofgem reviews the energy price every three months, and this may go up or down based on circumstances.
- You know when prices are going to be high because electricity providers give you advance notice. If there is an anticipated price hike, you are informed in advance to stay updated with trends and manage your energy consumption likewise.
- Your contract in standard variable tariffs is usually open-ended, giving you the fair opportunity to switch to the best utility provider when you feel like. A variable tariff offers greater control and flexibility, however, some aspects must be kept in mind when choosing such a tariff.
- You become vulnerable to energy market fluctuations. If the price hikes, you are going to pay more, which might disturb your finances.
- It can make your budgeting slightly more complex compared to fixed tariffs, as prices may fluctuate depending on the global market dynamics.
- You need to closely monitor the market trends and rely on experienced energy consultants for active energy management.
- Standard variable tariffs are fit for large businesses, companies with internal energy procurement expertise, and energy-intensive businesses.
How Energy Suppliers are Evolving?
Considering the changing market dynamics and price hikes, energy suppliers in the UK are improving them to better service evolving business needs. There are energy providers who combine variable tariffs with risk management consultancy and real-time market access to help businesses navigate energy choices more confidently. With the rising focus on sustainability, they have introduced green tariffs, enabling businesses to fulfil their environmental responsibility. Energy suppliers are now more focused on empowering businesses and supporting them to take control of their energy.