Choosing the right energy tariff for your business can be a difficult process, particularly as it affects your expenditure and consequently your profitability. There are so many options, with different benefits and drawbacks that it is hard to know which one will suit you best.
This blog post will help make the decision easier by giving you all the information you need to know about fixed tariffs versus flexible tariffs, including their main differences and how they should be considered based on your needs as a company. We also have some great tips for saving money on energy bills, no matter what type of tariff you choose!
Fixed energy tariff
A fixed tariff is an energy contract for a set period of time that has the same price per unit, such as £0.08/kWh, over this duration and cannot be changed during the contract term without incurring charges from your supplier. Contract length can vary from a year through to 3 years term.
These contracts are advantageous in situations where you know the energy prices are likely to increase during the length of the contract and calculations suggest you’ll have paid more by the end of your contract.
For example, if you know that electricity prices are likely to increase by at least £0.03/kWh during the length of your contract (taking into account predicted inflation), it might be advantageous for you to sign a fixed tariff contract with this lower price per unit in order to carry on paying the lower rate throughout.
However, if you are anticipating a decrease in energy price during this period of time then it may be more sensible to sign up for a flexible contract.
Fixed contracts are great for forecasting expenditure, assuming you have some awareness of your typical monthly energy consumption you can easily predict your monthly energy bill.
Variable energy tariff
Variable tariffs are the most basic and cost-effective type of tariff available on the market. They allow you to pay for your energy usage as it fluctuates during each billing cycle, which means that when prices go up or down your electricity and gas bill does too. Therefore your bill can vary month to month even though your energy usage remains the same.
The analogy of a variable rate mortgage could be used to understand a variable energy tariff. Just as the Bank of England’s base rate affects the mortgage the wholesale energy prices cause price change.
This type of tariff is not the best if you’re looking for something to help with budgeting, as it can be unpredictable and difficult to estimate what your monthly energy bill will look like. However, variable tariffs are ideal for businesses that want their prices to follow supply-and-demand fluctuations in the industry.
Variable energy tariffs tend not to have exit fees which are usually found in fixed tariffs. This means that if you’re not satisfied with the variable tariff, or business conditions change and lead to cheaper rates elsewhere, then it is possible for your contract to be transferred without incurring a fee.
The drawback with such a tariff is that you bear the risk or benefit of energy price fluctuation whilst with a fixed tariff the risk or benefit is passed onto the supplier. It, therefore, requires that you monitor energy price fluctuations and proceed accordingly though this requires time investment on your part.
The right plan for you
If you’re looking for a solution that offers predictable expenditure with less risk and your energy consumption is significant then it may make sense for you to go down the route of getting a fixed contract as you won’t be impacted by price fluctuations and can have a greater month to month control of your expenditure.
In contrast, if you’re looking for a solution that offers more flexibility and your energy consumption is less, then it may make sense to go down the route of getting a flexible contract.
If you’d like further information related to the specific business circumstances you are welcome to speak to one of our colleagues who can advise further.