Posted on 23rd March 2020

Energy purchasing can be a complicated task to fulfill, particularly when it comes to electricity. When considering your next business contract, it is important to understand the charging structure within the offer and what you are paying for. For many small businesses, not having the time or knowledge to review and implement the best energy contracts for their businesses can often lead to overpaying further down the line.

Breaking Down Bills
Interestingly, and often not well known, wholesales energy costs make up only approximately 40% of your total energy bills, the other part is made up from a mixture of additional 3rd party charges including government levies, which often focus on support for green energy incentives like Feed In Tariffs and the climate change levy. Further charges include payments for maintaining infrastructure, transmitting and distributing energy from power stations and across the national grid. Surprisingly the continuous upward trend in energy costs is due to the non-commodity elements of your energy bill, rather than the wholesale cost of energy. The chart below gives an example of this:

*Contracts for Difference
**Climate Control Levy

Finding the Best Deal
The price you pay for your energy depends on many factors, including the type of procurement contract you opt for, the length of that contract and your overall consumption. All of these will vary by supplier, meaning finding the best price can be quite confusing. Essentially there are 3 types of electricity contracts: Pass Through, Fixed and Fully Fixed.

Pass-Through contracts differ from fully fixed contracts in that only the wholesale part of your price is fixed for the length of the contract. All other non-commodity costs including transmission, distribution, government taxes and levies are passed through to the consumer via their supplier at cost and can change as these are a variable charge. In fully fixed contracts these charges are higher as they have a risk weighting applied to allow for price increases.

The benefit of this approach depends on small increase in the pass-through charges throughout your contract. If these charges don’t increase significantly during the contract period, you will benefit from lower overall costs, however the risk is that they will.

Fixed or Partial Pass Through,
This type of contract fixes the wholesale cost of the energy for the contractual period, and the 3rd party charges mentioned above will be set at this point. The suppliers are then responsible for any increases in 3rd party charges up to a certain point. If charges exceed a certain amount, which should be outlined in the terms and conditions they can then pass through these charges to the end user.
This type of contract Is less risky than a full pass-through contract and is aimed at businesses who would like slightly more security in their contracts but do still have a higher risk threshold.

Fully Fixed,
These types of contracts are aimed at businesses with little appetite for risk and those that want absolute budget certainty. The price of the unit rate, including all non-commodity charges is fully fixed for the duration of the contract. A a result the unit rates and standing charges tend to be higher, as the supplier must build risk of future increases to 3rd party charge into their offer. It must still be noted that these contracts can till be exposed to new taxes as well as increases to the climate change levy (CCL) and VAT.

Your choice

While for most SMEs outright cost will be the primary driver, in some cases different factors may come into consideration, depending on the nature of your business and your wider targets.

Working with an energy consultant can help your business find the most suitable contracts for your businesses needs based on your attitude to risk.

Get a fresh pair of expert eyes cast over your bills and see if efficiencies or errors can be identified.

Troy UK has vetted and approved consultants you can use to be sure of a great service.

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