Fixed vs. Variable Energy Tariffs - A Guide for Businesses

There’s no question about it; business energy tariffs can be confusing, and finding the right one for you can be challenging. However, understanding the difference between fixed and variable rates is essential if you’re going to keep your business energy costs under control.

Different businesses have different needs, and one of the results of the liberalisation of the energy market has been a plethora of deals to suit those needs. But even though picking your way through this can feel like hacking through a forest, the financial benefits can make it more than worthwhile.

Understanding Fixed Tariffs

A fixed business energy tariff has several defining characteristics. It is a fixed-term contract, so it runs for a set period of time and then expires. Until the end of that contract, your unit rates and standing charges will remain fixed, but at the same time, you cannot simply exit that contract without incurring substantial financial penalties.

It is important to point out that although your unit rates and standing charges will remain fixed, your bill will not be the same every month unless you use the same amount of energy. While your standing charge will remain the same throughout your contract, your unit charge will fluctuate according to usage.

Advantages of Fixed Tariffs for Businesses

The big advantage of a fixed tariff is that it offers certainty for a business. You know where you stand, and the only thing that will affect the size of your bill should be the amount of energy that you use. And if a fixed rate tariff at an attractive price comes along at a time when you happen to be looking for one, locking into it could be of significant financial benefit to your company.

Disadvantages of Fixed Tariffs for Businesses

The big disadvantage of fixed tariffs is that one person’s certainty is another person’s inflexibility. Once you’re tied into that price, you’re tied in and if, say, gas wholesale prices were to come down and lower everybody else’s bills, they wouldn’t reduce yours. And the financial costs involved in leaving a fixed tariff are such that it isn’t worth your while trying to break one.

Do Fixed Tariffs Protect Against Price Hikes?

A fixed tariff locks in your rates, but government-mandated costs can still change. For example, VAT is charged on business energy - most businesses pay the standard 20% rate, but some qualify for a reduced 5% rate. Other third-party charges can also change, but your contracted unit rate and standing charge will be protected.

Exploring Variable Tariffs

A variable tariff causes your unit rate to fluctuate based on market changes. If you secure a variable rate contract you may be paying less than a fixed deal or considerably more. The main risk with a variable rate tariff is that if energy costs dramatically increase, your energy bill will also increase. The market sets the rate.

Advantages of Variable Tariffs for Businesses

Variable tariffs tend to be cheaper than fixed rates and are considerably more flexible. Whereas fixed tariffs run for a fixed amount of time - and woe betide your company’s bank account if you try to break a fixed rate tariff contract early - you can usually switch variable rate tariffs at any point.

Disadvantages of Variable Tariffs for Businesses

You are at the mercy of the market and forces which are considerably beyond your control. The markets can be volatile, as seen during the energy crisis of the early 2020s. Even if you’re quick to switch tariff when an external shock takes place, you’ll likely still end up paying substantially more than someone on a fixed-term contract.

Factors Affecting Tariff Choice

There are several factors which you may wish to consider when choosing between fixed and variable tariffs:

• Do you place a premium on energy prices remaining stable?

• Are you financially insulated from higher bills should wholesale prices increase suddenly?

• Does your business’s energy usage vary significantly throughout the year?

• Is your business staying put, or are you thinking of moving?

What Are the Typical Contract Lengths for Fixed and Variable Tariffs?

You can ordinarily leave a variable tariff at any point with no financial penalties. With fixed tariffs, it is worth remembering that contract lengths for businesses tend to be longer than for domestic customers and that there is no automatic 14-day cooling-off period as there is for domestic contracts. This right only applies in very limited situations, so it is vital to check the contract terms carefully before you sign.

How to Switch Business Energy Tariffs

The first thing to remember here is that if you’re on a fixed tariff, you can’t look for a new deal until your current one enters its renewal window. The length of this window varies by supplier, so check your contract, but it is typically between one and six months before your deal’s end date. If you’re within that window, these steps are all it takes to change tariff and supplier:

• Track down your energy contract. This contract will tell you important information about your business energy rates and allow you to compare business energy prices per kWh when the contract ends. If you don’t have a copy, your latest statements will also have this information.

• Remember that with business energy suppliers, you will usually have two separate accounts for gas and electricity.

• Decide how you want to find and compare business energy supplier tariffs. You can use a business energy switching service, a broker, a comparison website or go directly to the provider yourself.

• Once you’ve decided on a new supplier, let your current supplier know you want to switch or an energy switching provider can do this for you. How to do this varies by supplier, but will be included on your bill.

• If you’re on a contract you need to give the required notice.

• Get confirmation when the new supply will start.

• Agree on the contract with your new supplier.

• Pay off any outstanding balance if you have one with your current supplier.

• If you’re on a variable rate, you can usually change supplier by giving 30 days' notice. The switch itself is now much faster, though the total time depends on your notice period.

• Remember; if you let your fixed-rate term expire and don’t renew it, you’ll likely end up being placed on ‘deemed’ or ‘out-of-contract’ rates. Out-of-contract rates are known to be the most expensive business energy contract, but if you do find that your company is in this position, you are free to switch energy suppliers or agree to a new business energy contract at any time.

Choosing the Right Energy Provider

Price is usually the biggest deciding factor when deciding on a new business energy supplier, but other factors to take into consideration may include the quality of their customer service, other auxiliary services that they may provide, their environmental commitments and their backups in case of emergencies.

Managing Business Energy Costs

Of course, you’ll still have a bill to pay regardless of what tariff you switch to, and the best way to significantly reduce your energy bills is effective energy cost management. You’ll save more in the long term by being more energy-efficient in the first place. Our guide on ‘How to Improve Business Energy Efficiency’ has a full range of measures that you could consider to improve your business energy efficiency, and consequently your bill.

The energy market remains sensitive to global events, and prices can change quickly. Businesses that don’t stay on top of their contracts can find their bills increasing at an alarming rate. To mitigate this, the first step should be understanding your current contract and ensuring the deal you have is the one that works best for your company. The potential financial benefits make complacency an expensive option.