What affects business energy prices in the UK?

As a business owner or manager, you’ll know that there are many and varied pressures that determine the price you charge for your product or service.

Consumer demand is one, the range and strength of your competition is another, as is the price that your competitors charge.

In any market, price isn’t everything. Factors such as customer service, reputation, or green credentials will all play a part. You may opt to pay a little more in order to be on a green tariff, which draws all or some of the energy from renewable sources.

However, when it comes to business energy prices, the amount you will have to pay is likely to be the determining factor in deciding which provider to choose.

So how does the UK energy market, made up of the Big Six energy companies - British Gas, eDF, e.ON, nPower, Scottish Power and SSE - and a myriad of independent suppliers, compete to win your business?

Primarily, suppliers compete on price in a bid to win customers, and there is constant pressure to keep costs down or risk customers switching to a rival.

However, all suppliers are subject to external market forces that will impact on domestic and business energy prices. So it’s worth knowing a little bit about the energy market in the UK and what affects it, so you can understand why prices can go up or down.

 

UK government energy policy

This has a big impact on what suppliers charge their customers. Currently, the UK government is driving up standards in the energy market, in particular moving towards renewable energy, so a proportion of what consumers and businesses pay is going towards funding this.

Brexit – and at the time of writing we were still in the EU but heading for the October 31 2019 deadline for leaving – may also have an effect on energy prices.

 

Exchange rate

The rate of exchange for the pound may have an impact on energy prices, as a weak pound increases the cost of importing equipment, services and, of course, wholesale supplies of gas and electricity.

 

Wholesale costs

The wholesale costs of gas and electricity will affect business energy prices. If the suppliers have to pay more for the ‘raw material’ it is possible, although not inevitable, that the price increase will be passed on, in whole or in part, to customers.

The wholesale price is subject to market forces. For example, hot weather and cold weather both put increasing demand on supplies - during the hot spells in 2010 the trading energy market for electricity reached a 17 month peak of £50/MWh (Megawatt Hour = 1,000 kWh) and again in November 2016 with a price of £67/MWh. In 2008 we hit rates at over £90/MWh, and that’s when most of the Big Six suppliers increased tariffs.

However, your tariff is made up of more than the wholesale cost, which accounts for 45%. The rest includes supply to your premises (17%); government taxes (20%); fees and profits (7%). As a business you also pay VAT at 20%, although charities are exempt from this.

Some smaller energy providers have ceased trading because they have been unable to absorb wholesale price increases. Unlike the Big Six energy suppliers, the smaller providers do not have the resources to buy their wholesale gas and electricity in advance, so price rises have more of an impact.

 

Sources of fuel

The UK is moving towards renewable sources of energy – indeed, 30% of energy is from wind turbines and solar power and this percentage is set to increase – but the country still relies on coal and gas powered stations, with nuclear making up a small proportion. Therefore, the wholesale prices for these raw and non-renewable materials has an impact on the price we pay for our energy.

As the UK moves closer towards reliance on renewables, price fluctuations should be less extreme for wholesale energy. In the meantime, it makes sense to be on a tariff which is most cost-effective for your business.

Even if you are partway through a contract, any early exit penalties may be more than mitigated by the saving you will make by switching to a new provider.

Why not get in touch with the team at Commercial Energy Group today and ask us to carry out a free price comparison? You could find business energy prices for up to 30% less. Email us or call us on 0333 305 2303.

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