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Microbusinesses are defined as non-domestic consumers who employ fewer than 10 employees (or their full-time equivalent) and have an annual turnover or balance sheet no greater than €2 million.
Such businesses may find it challenging to navigate the complex world of energy tariffs and micro business energy contracts, where one size does not fit all. Understanding the different types of tariffs available is crucial to ensure that microbusinesses are not overpaying for their energy usage.
Understanding Energy Tariffs
Micro businesses need to understand their energy tariffs to ensure they are not paying more than necessary for their energy bills. Energy tariffs are the rates charged by energy suppliers for the gas and electricity consumed by a business.
There are different types of energy tariffs available for micro businesses, including fixed-rate tariffs, variable-rate tariffs, and deemed rates. Fixed-rate tariffs provide a set rate for a specific period, while variable-rate tariffs fluctuate with the market. Deemed rates are charged when a business moves into new premises and does not agree on a contract with a supplier.
Types of Energy Tariffs for Micro Businesses
Micro businesses have different energy needs and usage patterns compared to larger businesses. Therefore, energy suppliers offer various types of tariffs to cater to the needs of micro businesses. The following are the three main types of energy tariffs for micro businesses:
Fixed Rate Tariffs
Fixed rate tariffs offer a set rate per unit of energy (measured in kWh) for a fixed term of the contract. This means that the unit price of energy remains constant throughout the contract term, irrespective of the market price fluctuations. However, the total bill amount may still go up or down depending on the energy usage. Fixed rate tariffs provide price certainty and make budgeting easier for micro businesses.
Variable Rate Tariffs
Variable rate tariffs offer a unit price that can change at any time, depending on the market price fluctuations. The supplier sets the unit price based on the wholesale energy market prices, which can vary due to various factors such as supply and demand, weather conditions, and geopolitical events. Variable rate tariffs offer flexibility, but they can also be unpredictable and result in higher bills during periods of high market prices.
Time of Use Tariffs
Time of use tariffs offer different unit prices for energy consumption during different times of the day. Suppliers divide the day into peak, off-peak, and shoulder periods, and set different unit prices for each period. Peak periods are usually during the day when energy demand is high, and the prices are the highest.
Benefits and Drawbacks of Different Tariffs
Pros and Cons of Fixed Rate Tariffs
Fixed rate tariffs are energy plans that offer a set price per unit of energy for a specific period, usually 12-24 months. Here are some pros and cons of fixed rate tariffs:
- Budget certainty: Fixed rate tariffs offer budget certainty as the price per unit of energy remains the same throughout the contract period. This makes it easier for micro-businesses to manage their energy costs.
- Protection against price hikes: Fixed rate tariffs offer protection against price hikes, which can be beneficial for micro-businesses that want to avoid unexpected increases in their energy bills.
- Peace of mind: Fixed rate tariffs offer peace of mind as micro-businesses can avoid worrying about fluctuations in energy prices.
- Lack of flexibility: Fixed rate tariffs lack flexibility as micro-businesses are locked into a contract for a specific period. This means that they may not be able to take advantage of lower energy prices if they become available during the contract period.
- Early exit fees: Fixed rate tariffs often come with early exit fees if micro-businesses want to switch suppliers or tariffs before the end of the contract period. This can be costly and may discourage micro-businesses from switching suppliers.
Pros and Cons of Variable Rate Tariffs
Variable rate tariffs are energy plans that offer a price per unit of energy that can change at any time. Here are some pros and cons of variable rate tariffs:
- Flexibility: Variable rate tariffs offer flexibility as micro-businesses are not locked into a contract. This means that they can switch suppliers or tariffs at any time without incurring early exit fees.
- Potential savings: Variable rate tariffs can offer potential savings as the price per unit of energy can be lower than fixed rate tariffs if energy prices decrease.
- No early exit fees: Variable rate tariffs do not come with early exit fees, which can be beneficial for micro-businesses that want to switch suppliers or tariffs.
- Budget uncertainty: Variable rate tariffs offer budget uncertainty as the price per unit of energy can change at any time. This makes it harder for micro-businesses to manage their energy costs.
- Exposure to price hikes: Variable rate tariffs offer no protection against price hikes, which can be detrimental for micro-businesses that want to avoid unexpected increases in their energy bills.
Pros and Cons of Time of Use Tariffs
Time of use tariffs are energy plans that offer different prices for energy consumption at different times of the day. Here are some pros and cons of time of use tariffs:
- Potential savings: Time of use tariffs can offer potential savings as the price per unit of energy can be lower during off-peak hours.
- Incentives to shift energy usage: Time of use tariffs can provide incentives for micro-businesses to shift their energy usage to off-peak hours, which can help reduce their energy bills.
- Tailored to specific needs: Time of use tariffs can be tailored to specific needs of micro-businesses that have predictable energy usage patterns.
- Complexity: Time of use tariffs can be complex to understand and manage, which can be daunting for micro-businesses that do not have the resources to monitor their energy usage.
- Limited availability: Time of use tariffs may not be available in all areas, which can limit the options for micro-businesses that want to switch tariffs.
Understanding energy tariffs for micro businesses can be a complex task, but it is essential for business owners to ensure they are getting the best deal and are not overpaying for their energy usage. In this guide, we have covered the basics of energy tariffs, how to compare them, and the different types of tariffs available to micro businesses.
It is important to note that the energy market is constantly changing, and tariffs can vary significantly depending on the supplier and location. Therefore, it is recommended that micro businesses regularly review their energy tariffs and switch to a better deal if necessary.
By using the information provided in this guide, micro businesses can make informed decisions about their energy usage and save money on their bills. Some key takeaways include:
- Understanding the difference between fixed and variable tariffs
- Knowing how to compare tariffs using the unit rate and standing charge
- Considering the benefits of green energy tariffs
- Checking eligibility for government schemes and grants
- Being aware of the rights and protections offered by Ofgem
Overall, micro businesses should take the time to research and compare energy tariffs to ensure they are getting the best deal for their energy usage. By doing so, they can save money and contribute to a greener, more sustainable future.