6 Tips for Understanding Business Energy Bills and the 6 Charges You Don’t See
2nd July 2018
Running a business or department means having many different tasks competing for your time. Scrutinising your business energy bills probably never makes it to the top of that list, yet spending a few minutes taking a look at your bills can really pay off.
There are various aspects of an energy bill that account for how much you're charged, with suppliers adding a margin for profit to ensure that they're making money from their own business models too. Here is a quick breakdown of the numerous factors that make up the bill for your business gas and electricity and the different factors that you don't see on your bill, but which still affect the price you pay.
1. Standing Charge
The standing charge is the rate you pay each day for the supply to your business premises, irrespective of how much energy you actually use. Business electricity tariffs always have a standing charge, however not all business gas tariffs do. If you have a particularly low standing charge (or none at all) the costs are likely being recovered by the supplier via your unit rate.
2. Unit Rate
The unit rate is the amount you pay for each kilowatt hour (kWh) of electricity or gas you use. Getting the lowest unit rate doesn't always mean you're paying the lowest possible price for energy. It depends on how much you use. Your unit rate is measured in pence per kilowatt-hour (p/kWh) for both gas and electricity.
3. Contract End Date
The contract end date, or CED, is the point at which your current price period ends. Make sure you terminate your energy contract (even if you may wish to stay with your supplier) or ask your broker to terminate it to ensure you can switch if you want or need to. Get in touch with us to find out your current energy supplier’s termination policy.
4. Climate Change Levy (CCL)
Introduced in 2001, Climate Change Levy (CCL) is a government levy that you pay, for every unit of non-renewable energy a business uses. Its purpose is to encourage various sectors to improve energy efficiency and cut their carbon emissions.
You will not have to pay CCL for any renewable energy (also known as Green Gas and Green Electric) you use. Similarly, businesses that use less than an average of 33 kWh of electricity and 145 kWh of gas per day don’t pay CCL either (which equates to 12,045 kWh of electricity and 52,925 kWh of gas per year).
You also don’t have to pay if your business has a domestic or residential element to it, for example a B&B or care home. Charities and non-profit organisations are entitled to an exemption from CCL too. However, some suppliers don't automatically apply the exemption which means you may be paying, even when you don’t need to. We can look into this for you and also apply for rebates if you’re exempt from paying CCL but have been doing.
5. Value added tax (VAT)
Most companies pay 20% VAT on their business energy bills. However, you will only need to pay 5% if you use less than an average of 33 kWh of electricity or 145 kWh of gas per day, or if you have a domestic or residential element to your business.
Charities and non-profit organisations are entitled to a VAT reduction too, payable at 5% - on energy used for non-business purposes. For example, if 35% of energy use is non-business, 35% can be taxed at 5% and 65% at the standard VAT rate. Many charities do not know they are entitled to claim the reduced VAT and CCL exemption, and some are also unaware that rebates for overpayment can be claimed quite far back too.
6. Smart meter charges
Some energy suppliers now provide a smart meter as standard. All will recover costs for these types of energy meters but some feature a specific charge on the bill too. However, even with an additional charge, a smart meter can still make real financial sense to some businesses.
The accuracy and regularity of their automated meter readings can help a business be more energy-efficient, improve cash flow through accurate billing and remove the administration and cost from the inevitable estimated read problems we have all suffered.
What You Don't See on Your Business Energy Bills
There are significant steps required to get your gas and electricity from source, to your business premises, and naturally the costs for enabling this need to be recovered by your energy supplier. These costs mount up to such an extent that they can make up over 50% of the average energy bill and include;
1. Wholesale energy
A large chunk of your energy bill can be explained by the costs suppliers pay to buy your gas and electricity from the wholesale market. The process works by providers buying the energy they expect you to use in advance of your contract starting - something that ensures you don't run out of gas or electricity throughout the duration of your contract. In some respects this is an advantage for businesses on fixed-price deals, as any increase in wholesale prices will not immediately have on impact on their bills.
The wholesale markets for electricity and gas are volatile. Prices in the gas market change daily and in the energy market every half-hour. Most businesses are insulated from this continuous fluctuation by virtue of the ‘retail’ price of gas and electricity being set higher than the wholesale price. However once that retail price has been breached, the whole market moves up again, retail price and all.
2. Transmission & Distribution
The cost of physically transporting your gas or electricity from source to its destination varies by area: the further away you are based from where the energy is generated or procured, the more it costs to transport. Transmission (Transmission Use of System charges (also known as TNUoS)) is akin to the national motorway network for energy whilst Distribution (Distribution Use of System (also known as DUoS)) is seen as the more localised A and B roads carrying the energy to its final destination. Both the cost of transporting and the cost of upkeep of the transportation system itself need to be paid for out of your energy bill.
3. Transportation Losses
The transportation of energy is an inefficient process. What gets loaded in at source will not be the same amount that makes it out at the meter/ premises. And, the further the energy has to travel the greater the volume of loss. As a result the cost of that loss falls more heavily on users who live more remotely from the source.
4. Industry Charges
The network of pipes, wires, organisations, authorities and regulators is huge within the energy industry. And it all needs to be paid for. Not only for upkeep but also for future proofing to ensure there’s a fit for purpose energy network well into the future. As a result all energy bills have an element of cost recovery to enable this continuous cycle to operate.
5. Government Initiatives & Levies
Although the Government have been explicit with the like of Climate Change Levy (CCL) appearing as a separate line on energy bills, there are a number of other levies that are hidden away. For instance the Renewables Obligation and Feed in Tariff (FiT) are two of the better-known ones.
6. Margins – There’s no Point Being in Business Without Them!
The final business energy bill element is supplier margin! Contrary to popular belief the average margin is not the biggest element on the bill, in fact it is amongst the smallest. Furthermore it is not all straight profit, with marketing costs, acquisition costs, administration costs all being covered before net profit is taken. Nobody is suggesting that energy suppliers aren’t highly profitable businesses but this comes with the quantity of customers they have, both domestically and commercially. And just like every business in the World, they have to make a profit, otherwise there’s no point being in business.
"The unit rate is the amount you pay for each kilowatt hour (kWh) of electricity or gas you use. Getting the lowest unit rate doesn't always mean you're paying the lowest possible price for energy. It depends on how much you use. Your unit rate is measured in pence per kilowatt-hour (p/kWh) for both gas and electricity."