Fixed vs Variable Energy Tariffs: Which Is Right for Your Business?

Choosing a business energy tariff is not just about finding the lowest price today. The type of energy contract you choose can affect your costs, cash flow and how easily you can budget for the months ahead.

For most businesses, one of the biggest decisions is whether to choose a fixed or variable energy tariff.

Both have advantages. A fixed tariff gives you greater certainty over the price you pay for each unit of energy, while a variable tariff allows your rates to move with the energy market.

So, which is right for your business?

What is a fixed business energy tariff?

A fixed business energy tariff locks in the price you pay per unit of electricity or gas for an agreed contract period.

That means if wholesale energy prices increase during your contract, your agreed unit rate will generally remain the same.

It is worth remembering that a fixed tariff does not mean a fixed energy bill. Your bill will still depend on how much electricity or gas your business uses, alongside the charges and terms included within your contract.

For more information on the charges that can appear on commercial energy bills, see PE’s guide to understanding your business energy bill.

Benefits of a fixed business energy tariff

For many SMEs, the main attraction is certainty.

A fixed energy contract can make it easier to:

• Budget for future energy costs

• Protect against increases in wholesale energy prices

• Forecast business overheads

• Reduce exposure to short-term market volatility

If your business values predictable costs and does not want to follow movements in the energy market, fixing your rates can provide useful reassurance.

What are the disadvantages?

The trade-off is flexibility.

If wholesale business energy prices fall after you agree your contract, you will usually continue paying the rate you originally fixed.

Business energy contracts can also run for several years, so it is important to understand the contract length, renewal terms and any conditions before agreeing to a deal.

What is a variable business energy tariff?

A variable business energy tariff works differently.

Instead of fixing your energy rate for the full contract term, the amount you pay can move up or down depending on energy market conditions and the terms of your agreement.

When market prices fall, a variable tariff may allow your business to benefit from lower rates.

But the opposite is also true.

If wholesale electricity or gas prices rise, your costs can increase too.

Benefits of a variable business energy tariff

A variable contract may appeal to businesses that:

• Are comfortable with changing energy prices

• Want greater exposure to falling market prices

• Have flexibility within their budgets

• Prefer not to lock in a rate at current market levels

For businesses with a good understanding of their consumption and greater tolerance for price changes, variable pricing can offer more flexibility.

What are the risks?

The biggest risk is uncertainty.

Energy markets can change quickly, making it harder to predict future business electricity and gas costs.

For businesses operating on tight margins, even relatively small changes in energy prices can make budgeting more difficult.

Ofgem’s guidance explains the differences between fixed, variable, deemed and out-of-contract arrangements for non-domestic customers. You can read its business energy guidance here.

Fixed vs variable business energy tariffs: what’s the difference?

The easiest way to think about it is:

Fixed tariff = greater price certainty

Variable tariff = greater exposure to market movements

Neither is automatically better.

A fixed tariff may cost more than a variable tariff if market prices fall. A variable tariff may cost considerably more if prices suddenly rise.

The right choice depends on what matters most to your business.

Which business energy tariff should you choose?

Before choosing a new business energy contract, consider these five things.

1. How predictable does your budget need to be?

If knowing roughly what you will pay for energy is important for managing cash flow, a fixed tariff may be more suitable.

2. How much energy does your business use?

The more electricity or gas your business consumes, the greater the financial impact of changes in your unit rate.

Understanding your annual consumption can help you assess how much risk you are comfortable taking.

Businesses can also take steps to manage the amount of energy they use. Read our guide to practical ways businesses can reduce energy consumption for some straightforward places to start.

3. How predictable is your energy consumption?

A shop operating the same hours every week may have fairly consistent consumption.

A manufacturer, seasonal hospitality business or growing multi-site company may see much larger changes throughout the year.

Looking at your actual usage data before choosing a tariff can give you a much clearer picture.

4. How comfortable are you with changing energy prices?

Would an unexpected increase in your business energy bill cause problems?

If the answer is yes, fixing your unit rate may offer more certainty.

If your business has enough flexibility to absorb price movements, a variable contract could be worth considering.

5. What are the full contract terms?

Do not look at the unit rate alone.

When comparing business electricity and gas tariffs, check:

• Unit rates

• Standing charges

• Contract length

• Renewal terms

• Payment terms

• Additional charges

• Any conditions that allow rates or charges to change

The cheapest-looking rate is not always the cheapest contract overall.

If you’re reviewing your supply, you can find more information about PE’s business electricity options and business gas solutions.

Don’t leave your business energy contract until the last minute

One of the easiest ways to lose control of your energy costs is simply forgetting when your contract ends.

If a business energy contract expires without a new agreement in place, you could move onto an out-of-contract, deemed or rollover arrangement, depending on your circumstances and existing terms.

These rates may be different from those available through a newly agreed contract.

Ofgem advises businesses to understand their contract end dates and what happens when an agreement expires, particularly as deemed and out-of-contract tariffs can be more expensive. Read Ofgem’s guidance on business energy contracts.

Keep a record of your contract end date and start reviewing your options before renewal.

It gives you more time to understand the market, compare business energy prices and decide whether fixing or going variable makes sense for your business.

Fixed or variable: there is no one-size-fits-all answer

For many businesses, a fixed energy tariff offers something valuable: certainty.

For others, the flexibility of a variable energy tariff and the possibility of benefiting when market prices fall may be worth accepting additional risk.

The important thing is to make the decision based on your business rather than simply choosing whichever tariff has the lowest headline rate.

Consider your consumption, budget, appetite for risk and the full terms of the contract.

Looking for a business energy quote?

PE helps businesses take a clearer approach to their energy.

From business electricity and gas to smart energy solutions and practical ways to understand and reduce consumption, we make managing business energy simpler.

And with our electricity fuel mix 100% sourced from renewable generation, businesses can choose PE knowing their electricity is backed by renewable energy too.

Ready to review your business energy options? Get a quote from PE today.

Frequently Asked Questions

Is a fixed business energy tariff always cheaper?

No. A fixed tariff locks in an agreed unit rate, but energy market prices can move both up and down. The main benefit of fixing is price certainty rather than a guarantee of getting the cheapest possible rate.

Can business energy prices change on a fixed tariff?

A fixed business energy tariff generally fixes the price you pay per unit for the agreed period. However, contracts differ, and some charges or contract conditions may allow costs to change. Always check the terms before signing.

Are business energy tariffs covered by the energy price cap?

The household energy price cap is designed for domestic energy customers rather than standard non-domestic business energy contracts. Businesses should therefore pay particular attention to their contract terms, rates and renewal dates.

How long can a business energy contract last?

Business energy contracts can vary considerably in length and may run for several years. The best contract length will depend on your business, current prices and how much certainty you want.

When should I compare business energy prices?

It is sensible to start reviewing your options before your existing energy contract expires rather than waiting until the final few days. This gives you more time to compare tariffs, understand your usage and choose a contract that suits your business.