Introduction

For small and medium-sized enterprises (SMEs), managing energy costs effectively starts with understanding business energy contracts. Unlike domestic energy deals, business contracts are tailored to specific needs and often involve different terms, tariffs, and contract lengths. This guide covers everything SMEs need to know about business energy contracts, including key differences between gas and electricity agreements, contract types, and how to navigate complex terms.

"Choosing the right energy contract can save businesses up to 40% on annual energy bills." – Energy Savings Trust

Key Differences Between Business Gas and Electricity Contracts

While both gas and electricity contracts share some similarities, there are important differences SMEs should be aware of:

<table>

<thead>

<tr>

<th>Feature</th>

<th>Business Gas Contracts</th>

<th>Business Electricity Contracts</th>

</tr>

</thead>

<tbody>

<tr>

<td>Pricing Structure</td>

<td>Priced per kWh, often lower than electricity</td>

<td>Priced per kWh, fluctuates more due to demand</td>

</tr>

<tr>

<td>Standing Charges</td>

<td>Typically lower</td>

<td>Usually higher due to network costs</td>

</tr>

<tr>

<td>Contract Lengths</td>

<td>Can be long-term (up to 5 years)</td>

<td>Typically between 1-3 years</td>

</tr>

<tr>

<td>VAT Rate</td>

<td>20% (unless SME qualifies for a reduced rate)</td>

<td>20% (with potential reductions for low usage)</td>

</tr>

<tr>

<td>Supplier Switching Time</td>

<td>4-6 weeks</td>

<td>3-4 weeks</td>

Tip: If your business uses both gas and electricity, consider a dual-fuel contract for easier management and potential cost savings.

Types of Business Energy Contracts

Business energy contracts come in several forms, each with different levels of pricing stability and flexibility.

1. Fixed-Term Contracts

A fixed-term contract locks in your kWh rate for the duration of the agreement, providing price certainty and helping businesses manage budgets.

Best for: SMEs looking for stability and predictable energy costs.

Pros:

• Protection from price fluctuations

• Easier budgeting and forecasting

Cons:

• May be tied to a higher rate if energy prices fall

• Early termination fees may apply

2. Variable-Rate Contracts

A variable contract means the price per kWh can change based on wholesale energy market rates.

Best for: Businesses that want flexibility and can handle market fluctuations.

Pros:

• Potential for savings if energy prices drop

• More flexibility for switching

Cons:

• Higher risk due to price increases

• Uncertainty in budgeting

3. Rollover Contracts

If a business fails to renegotiate or switch suppliers before their current contract ends, they may be placed on a rollover contract, which often has higher rates.

Best for: No business should ideally be on this contract—always negotiate a renewal before your term ends.

Pros:

• Automatic continuation of service

Cons:

• Typically higher rates with less flexibility

• Harder to switch until the new term expires

4. Deemed & Out-of-Contract Rates

Businesses that move into new premises without setting up an energy contract may be placed on a "deemed" or "out-of-contract" rate, which is one of the most expensive tariffs.

Best for: Emergency situations only.

Pros:

• No need for long-term commitment

Cons:

• Extremely high rates

• Should be switched as soon as possible

Understanding Contract Lengths

Business energy contracts can range from 1 to 5 years, with pros and cons for each duration.

<table>

<thead>

<tr>

<th>Contract Length</th>

<th>Pros</th>

<th>Cons</th>

</tr>

</thead>

<tbody>

<tr>

<td><strong>1 Year</strong></td>

<td>Greater flexibility, ability to renegotiate frequently</td>

<td>Potential exposure to rising energy costs</td>

</tr>

<tr>

<td><strong>2-3 Years</strong></td>

<td>Balance between stability and ability to switch if prices fall</td>

<td>May not benefit from market price drops</td>

</tr>

<tr>

<td><strong>4-5 Years</strong></td>

<td>Long-term price security, good for budgeting</td>

<td>Less flexibility, potential overpayment if prices fall</td>

</tr>

</tbody>

</table>

Tip: If market prices are low, locking in a longer contract can be beneficial. If prices are high, a shorter contract may be preferable.

Key Terms in Business Energy Contracts Explained

Standing Charge

A daily fixed fee paid regardless of energy usage. Some contracts offer no-standing-charge options but often have higher unit rates.

Unit Rate

The price per kWh of electricity or gas used. This is the main variable cost in an energy contract.

Pass-Through Charges

Additional costs related to energy distribution, maintenance, and government levies. Some contracts allow these charges to be passed directly to the customer, making pricing less predictable.

Climate Change Levy (CCL)

A government tax designed to encourage energy efficiency. SMEs using minimal amounts of energy may qualify for exemptions.

Renewal Window

The time period before the contract ends when a business can negotiate a new deal or switch suppliers without penalties.

How to Secure the Best Business Energy Contract

Step 1: Understand Your Energy Usage

Check past energy bills to understand how much energy your business consumes and at what times of the day.

Step 2: Compare Supplier Offers

Use a business energy broker or comparison site to review different supplier options and contract types.

Step 3: Negotiate Your Contract

Many suppliers offer room for negotiation, especially on contract terms and pass-through charges.

Step 4: Read the Terms Carefully

Look out for hidden fees, automatic renewals, and termination clauses before signing.

Step 5: Monitor and Renew Proactively

Set reminders for contract end dates to avoid falling onto expensive rollover rates.

FAQs About Business Energy Contracts

Can I cancel my business energy contract early?

Most business energy contracts have strict termination clauses, and early exits often result in fees. Check contract terms before attempting to leave early.

What happens if I don’t renew my contract on time?

You may be placed on a rollover or out-of-contract rate, which is usually more expensive.

Are business energy rates cheaper than domestic rates?

Not always. While businesses can negotiate better rates, standing charges are typically higher than for domestic customers.

Can I switch suppliers if I move premises?

Yes, but you may need to pay exit fees unless your contract allows termination due to relocation.

What should I do if my energy costs are too high?

Consider renegotiating your contract, improving energy efficiency, or switching suppliers to a better tariff.

Conclusion: Choosing the Right Business Energy Contract

Understanding business energy contracts is crucial for SMEs looking to manage costs effectively. By selecting the right contract type, negotiating favourable terms, and proactively managing renewals, businesses can avoid unnecessary expenses and ensure long-term energy savings.

Next Steps: Contact an energy broker or supplier today to explore the best contract options for your business.