Understanding Business Energy Pricing

When you see an energy quote like “25 pence per kWh,” what does that actually include? Business energy prices are made up of several components beyond just the raw cost of gas or electricity. Understanding these pieces will help you compare offers and know what you’re paying for. Let’s break down the typical elements of a business energy price:

1. Wholesale Energy Cost: This is the base cost of the electricity or gas itself, as traded in the wholesale market. It’s essentially what the supplier pays (or locks in) for the energy on your behalf. This portion can fluctuate a lot with market conditions. For instance, in an average contract maybe around 35–40% of your electricity rate covers the wholesale energy, though that can vary. If market prices for power go up, this portion of a new quote will go up accordingly.

2. Network Charges: These are costs for delivering electricity or gas over the grids and pipes. Every supplier has to pay your local distribution network and the national transmission network to use their systems, and they pass that fee to you. On electricity bills, you’ll see charges like DUoS and TNUoS (for distribution and transmission use of system) – those are network costs. Collectively, network charges can account for perhaps 15–20% of your bill (more in some areas). They tend to increase over time as infrastructure is upgraded, and they can differ by region and time of use. (Using power in peak times costs more in network fees.)

3. Environmental and Policy Levies: These are government-mandated charges to support various initiatives – primarily green energy programs. Examples include the Renewables Obligation, Feed-in Tariff, Contracts for Difference levy, and the Capacity Market charge. These add costs that fund renewable generation, small-scale solar, backup power capacity, etc. Every supplier faces these obligations and includes them in rates or passes them through. These policy-driven charges might be on the order of 10–15% of your total cost. They can change with government policy (for instance, new schemes or changes in funding levels) and usually update annually.

4. Supplier Operating Costs and Margin: Naturally, suppliers have overhead – billing systems, staff, other business costs – and they need to make a profit. A portion of your rate covers the supplier’s own costs and profit margin. In a competitive market, this portion is kept in check by the need to offer you a low price. It might be relatively small (a few percent of the total rate). This category also includes any broker commission if you’re using a broker – essentially, the supplier builds that into the rate it offers. Reputable brokers will disclose this commission openly (for example, we show you exactly what fee is included when we present quotes).

5. Taxes (VAT and CCL): Finally, on top of the per-unit rate and standing charge, there are taxes. Businesses pay 20% VAT on energy in most cases (unless you’re eligible for a reduced 5% rate, like some charities or very low usage sites). There’s also the Climate Change Levy (CCL), which is a tax on business energy use (currently around 0.775p/kWh for electricity, 0.672p/kWh for gas – it changes each year). Often, when you receive quotes from suppliers or brokers, they exclude VAT and CCL in the quoted rate. Those get added on the bill. So remember to factor that in: the quote might say 15p/kWh, but your all-in cost on the bill will be ~19p once you add 20% VAT, plus a bit for CCL. (If you’re exempt or partially exempt from CCL, make sure your supplier knows.)

All-Inclusive vs. Pass-Through Pricing: One big thing to understand is that some contracts bundle all these costs into your unit rate (all-inclusive or “fully fixed” contracts), while others separate some of them (pass-through contracts). In a fully fixed contract, you pay one flat rate per kWh that includes wholesale, network, levies, etc. This gives certainty – you know your cost – but the supplier will add some premium to cover the risk if those non-energy costs rise. In a pass-through contract, the supplier might charge you a lower headline rate for energy but then bill certain charges (like network fees or levies) to you at cost, which means your bills can vary over time. Large businesses sometimes opt for pass-through to potentially save if they can manage those components actively. Most small businesses prefer fully fixed for simplicity. When comparing quotes, it’s crucial to know if you’re looking at fully loaded rates or pass-through rates. An offer might seem cheaper but could be pass-through – meaning you’d face those extra charges separately.

Standing Charges: In addition to the per-kWh price, business contracts usually have a daily standing charge (or for gas, sometimes a pence-per-day rate). This is a fixed daily fee that covers having the supply available (meter costs, admin, etc.). It can range widely – from under 30p a day for a small shop’s electricity to several pounds a day for larger supplies. When comparing offers, check the standing charge too, not just the unit rate, because a high standing charge might offset a slightly lower unit rate depending on your usage.

Putting It Together: Let’s imagine a simplified breakdown for a typical SME electricity contract: about 40% of the cost might be the wholesale energy, ~20% network, ~15% green levies, ~5% other supplier costs, and ~20% VAT+CCL on top (which isn’t in the quote). That aligns with many real-world scenarios where well over half of what you pay is for “stuff other than the energy”. The key takeaway is that when you’re shopping for energy, you’re really shopping for a bundle of energy + all these extras. Always compare on a like-for-like basis (fully fixed vs fully fixed, same assumptions on charges). And if a price seems too good to be true, look closely to see if some costs are being left out of the quote.

By understanding what makes up your energy price, you can ask better questions and avoid surprises. If this still seems like a lot – don’t worry, it is complicated! That’s why we’re here to help. Our team can break down any quote for you and make sure you know what you’d be signing up for. Feel free to read our guide on comparing quotes for more tips, or dive deeper into network and policy charges if you’re curious. And as always, you can contact us for advice – we’ll be happy to examine your current rates and see if we can find a better deal.