Energy prices, it feels like it’s all we talk about now, whether its domestic or business energy rates, but there is good reason for it. Are you feeling like you are stuck between a rock and a hard place when it comes to your energy rates? Don’t worry you are not alone, businesses across the UK are in the same boat. With wholesale prices still rising and the uncertainty around prices moving forwards many business owners are rightly concerned.
This brings us to the all-important question, should I fix my business energy rates now or wait to see how the market is? As much as we’d all love to know that cheaper energy prices are just around the corner, the truth of the matter is that nobody knows if prices will increase or decrease. In this guide we will be explaining why energy prices are currently so high, what affects energy prices and analysing the benefits and drawbacks of fixing your business energy rates.
Should I lock in my business energy rates now?
This isn’t something we can answer, no one knows your business better than you. What is comes down to is your attitude towards risk, this will be the driving force behind your answer to this question.
Although predictions are indicating that prices will continue to rise, nobody can be sure. If these predictions are correct by locking in a business energy tariff today, you could save money against tomorrow’s possible price. However, the exact opposite could also happen where you lock into a contract at higher rates to see prices drop a few months later.
Many business owners are now leaning towards locking in prices for 2-3 years with historic pricing trends over the last few years showing us this may be the new normal.
Find Dyce Energy’s latest prices in less than 2 minutes here.
Why do energy prices increase?
Several factors affect energy prices to rise, such as supply and demand issues. When demand for energy increase but the supply is lacking, it means the wholesale price of energy increases. As a result of this, the energy supplier will have to pay more the energy initially with the costs being passed on the bill of the consumer.
World events will also have an affect on the price of energy. We have seen this in recent times with events such as the Covid-19 pandemic, Russia’s invasion of the Ukraine and more recently the conflicts in the Middle East.
Why are energy prices so high in the UK?
The rise in energy costs is a worldwide issue but why is it particular higher in the UK than everywhere else? The UK has had some of the same issues as other nations, such as world events like the Russian – Ukrainian War, but the UK has also been met with its own issues.
UK Energy Infrastructure
The UK has been hit hard with energy prices in part due to our energy infrastructure. When comparing to other nations, the UK’s storage capabilities is significantly less than those in other nations. With this issue alongside the UK’s high levels of energy usage have made it more difficult for UK energy suppliers to keep up with demand, which has led to increased prices.
Supply issues
The winter of 2023 saw temperatures drop dramatically to levels that were unexpected across Europe. Couple this with the increase in demand for energy in Asia, this created a perfect storm of a lack of supply but high levels of demand. As a result of this we saw energy prices skyrocket over the winter months.
Historical contracts
With energy prices skyrocketing, most news only reported on the increase of prices for the end user. However, with the cost of energy on the wholesale increasing so dramatically over a short period of time, a huge amount of pressure was placed on energy suppliers as previously agreed fixed tariffs saw them end up losing money on the energy provided. With this in mind, energy providers have begun to place a higher ‘margin’ on energy rates to account for fluctuations on the wholesale market.
I want to renew my business energy contract, should I take a fixed or variable tariff?
Renewing your business energy contract is a decision that should always be carefully considered, and there are several compelling reasons for both a fixed and variable tariff.
Fixed Tariff
A fixed tariff is where you agree to a price per unit of energy used and your standing charge at the point of signing your energy contract. These prices are locked in until the end of your contract period, typically between 1 – 3 years.
Signing up to a fixed tariff can be beneficial to your business due to:
Price Stability: By signing up for a fixed tariff, it creates a layer of protection for the business from fluctuations of energy prices on the wholesale market. The stability is especially valuable for businesses operating on a tight budget or those that rely heavily on energy intensive operations.
Long term planning: By locking into a fixed tariff, a business can plan for its energy needs over the long term. It provides a level of stability and predictability that will assist in the budgeting and forecasting of the business.
Variety of options: when looking a fixed tariffs these are usually the cheapest rates that are available to you, but they also come with a wide range with some offering additional benefits of renewable options. Having this wide choice to pick from means you can select the tariff that best suits your businesses needs.
However, it’s not all positive there are some potential drawbacks of a fixed tariff:
Missed savings: If energy prices were to fall, you wouldn’t be able to take advantage of this as you fixed your price with your contract.
Early Exit Fees: If you signed up for a fixed tariff, if you wanted to break this contract and leave before it’s end date you will usually incur some kind of early exit fee. This will be on your contract or if you are unsure contact your supplier directly.
Variable Tariff
A variable tariff is where the price per unit of energy and standing charge can increase or decrease, depending on the market. This means your bill could rise from month to month, even if you are using the same amount of energy.
So why would you potentially sign up for a variable tariff:
Potential Savings: If the cost of energy were to fall on the wholesale market, you will reap the benefits following this. Your supplier will usually lower your rates in accordance with the wholesale market.
Flexibility: Unlike a fixed tariff, when you sign up for a variable tariff in most cases you are able to leave at any point without the need to pay any exit fees.
It’s not all positive, variable tariffs do have some negative points:
Price Hikes: Although your supplier will always inform you in advance of any price hikes this is what you sign up to when you take a variable tariff. If prices rise on the wholesale market, these additional costs will be passed on to you, meaning you could end up paying more for the same amount of energy used.
Added pressure: By taking a variable tariff there is an added pressure on the individual in charge of energy within businesses. They will need to keep an eye on the energy market and its fluctuations, as sharp increases may lead to them needing to consider alternative options.
Long term planning: By taking a variable tariff it makes long term planning significantly more difficult to undertake. This is due to the uncertainty over the cost of your energy, even if you use a similar amount each month fluctuations in unit rates and standing charge make predicting costs near impossible.
Switching your business energy
Now you know the key difference between fixed and variable tariffs, if you are looking to switch your business energy, we are here to help.
You can learn more about the switching journey with Dyce Energy here.
Or if you are ready to make the switch now, you can complete our online switching for in less than 2 minutes here.
