In the United Kingdom, commercial energy is typically purchased in contracts called tariffs. These are available in a variety of formats, ranging from short, variable contracts to long-term, fixed-rate options. Choosing the right one for your business comes down to knowing your company’s energy needs and comparing them to these available formats.
Comparing Fixed-Rate and Variable-Rate Energy Tariffs
There are two primary types of commercial energy tariffs in the United Kingdom. These are fixed-rate tariffs and variable-rate tariffs. Each offers unique benefits and potential drawbacks, so understanding both will help your business make the smartest investment in your energy expenses.
One of the biggest benefits of fixed-rate tariffs is that they offer predictable pricing. Companies using this pricing structure pay per unit of energy, regardless of any market fluctuations. This makes budgeting more straightforward for businesses. This predictability protects your business from price hikes as well, providing stability that many business owners appreciate. With money that might otherwise have to be reserved for covering unexpected price fluctuations now freed up for use elsewhere, your business can focus more on meaningful expenses and less on energy costs.
However, fixed-rate tariffs are not the right choice for every business. While it is nice not to worry about changing prices, this can mean that your business cannot take advantage of lower market prices and the savings that might come with them. Likewise, initial rates may be higher than they would otherwise be, since there is no room for fluctuation. That missing flexibility and the potential lost savings are the primary reasons some businesses choose variable-rate tariffs instead.
While these descriptions might make it obvious which primary type of tariff would work best for your business, it is important to remember that this is not the only variation in contracts. Commercial energy providers also offer contracts of several different lengths – and each of these carries its own risks and rewards.
12-Month Commercial Energy Tariffs
A 12-month contract offers the greatest level of flexibility. That means that your business can take advantage of favourable changes in the market, or newer, more competitive tariff rates if they become available. Since you are not locked into a longer contract, you can change your mind more often to meet changing needs with changing conditions more readily.
These shorter contracts also offer maximum adaptability. This is a boon for businesses experiencing rapid growth or other fluctuations. As these changes happen, you can rise to meet them with a change in your commercial energy contract.
It is important to remember, though, that there are drawbacks to any contract. The potential risks of a short energy tariff all relate to its length and the problems that it may cause for your business.
For instance, shorter lengths of time between contract renewals means higher exposure to market volatility. Sharp increases in prices may mean significantly higher renewal rates. Short-term contracts are also more expensive per unit of energy, so these contracts are not desirable for businesses with stable energy use that are prioritizing saving money.
24-Month Commercial Energy Tariffs
Perhaps the best word for the 24-month energy tariff is balance. This is because the 24-month timeframe strikes a good balance between the flexibility of the 12-month contract and the stability of the 36-month tariff. These contracts offer a moderate level of commitment with equally moderate price security, making them a great compromise for many business owners.
These longer contracts also offer slightly better rates than 12-month tariffs. Spreading the cost out across a longer period means better costs per unit, so prices are more manageable on each billing statement. This allows for better budgeting over longer intervals, too.
Again, though, there are potential drawbacks to tariffs this length of time. While these medium-length contracts benefit from their balance between the other available options, they also suffer from it. They offer considerably less stability than 36-month tariffs, since they are more susceptible to market fluctuations than these longer contracts. They also do not provide the cost savings that 36-month tariffs do, making them less desirable for stable businesses that have predictable energy use schedules and are looking to economize. Lastly, they have less flexibility than shorter contracts, making them less desirable for companies facing growth or downsizing soon.
36-Month Commercial Energy Tariffs
The longest contract offered by most providers, the 36-month tariff is the best choice for frugal, stable businesses. This contract offers the best available per-unit energy rates. It also provides stability that protects the business client from market fluctuations, since the low initial rate is locked in across the length of the contract. While the flexibility of short contracts like the 12-month option is nowhere to be seen, the stability offered in its place is much more desirable for large businesses with predictable energy needs.
Ultimately, it is crucial to weigh the risks and rewards of any commercial energy man tariff. Your business has unique needs, so making this comparison for your specific situation is important for choosing the best possible contract.