Business energy price cap explained

Article posted

23rd Sep 2022

Read time

5-9 min read

Author

Mollie Pinnington

On 21 September 2022, the government announced further detail on what support is going to be available for non-domestic customers with their energy bills.

The new measures will be applied to energy bills from October 1st and will last until 31st March. This announcement comes after a £2,500 price guarantee was promised for domestic customers last week. Whilst the government has announced that they will pay £150bn to pay for households’ energy prices, and approximately £25bn cost for the business cap.

As with the energy support for households, businesses do not have to do anything to receive this support. The cap will automatically be added to energy bills.

Whilst this support is much needed, the government rollout has somewhat sent a confusing explanation of what the price cap looks like, as we explain below.

Each supplier will provide the detail of how this impacts your business upon receipt of your first energy bill for the billing cycle after 1st October 2022.

 

Fixed tariff customers

 

All non-domestic customers, apart from those on existing fixed-term contracts agreed before 1 April 2022 will be eligible for support. If you are entering a new fixed price contract after October 1st the price cap will also be applied to your bills.

Businesses will receive a discounted price against the wholesale element of your supply, not a discount against the full unit rate.  So the cap is not the p/kWh figure that you will see on your invoices. Currently, suppliers do not have the wholesale rate readily available for each customer, as this takes some work to unpick on their systems.

The price cap is agreed at 21.1 p/kWh for electricity and 7.5 p/kWh for gas.

According to Ofgem’s latest data from August 2021, the wholesale cost element of a bill is just 29% of an electricity bill and 41% of a gas bill. See the attached images taken from Ofgem’s website.

 

 

This means that the real-world benefit to energy bills is unfortunately not aligned with the headline help that the government had originally claimed. The price cap only applies to 29% of your electricity bill and 41% of your gas bill.

 

Deemed, default, and variable tariff customers

If you are on a deemed, default or variable tariff then you will also receive support, however, this will only be covered at a maximum discount of amount of 40.5p/kWh for electricity and 11.5p/kWh for gas. This is because prices for these types of contracts are still subject to wholesale market developments. This is again against the wholesale element only, not the full unit rate.

The discount will be the difference between a deemed wholesale rate and a maximum of 40.5 p/kWh for electricity and 11.5 p/kWh for gas. Therefore, if your deemed wholesale rate for electricity is 100p/kWh, the best possible wholesale unit rate that you could be charged for could be 59.5 p/kWh, in reality as the discount only applies to wholesale unit rates and a fixed price contract is less than this, there would be no benefit to remaining on deemed rates.

 

Flexible tariff customers

If your company is on a flexible purchase contract, support will be calculated by suppliers according to your company’s usage. This will also be subjected to the maximum discount as those on deemed, default, and variable tariffs have.

 

What we can do to support your business at this time

If you are not on a fixed rate contract for your business or your contract is coming to an end, don’t panic you can still get a fixed rate tariff after October 1st that will benefit from price cap discounts. If you are currently on a different type of contract such as deemed or variable, you will benefit from being on a fixed rate tariff. This will ensure that the price you pay throughout the cap remains the same. To maximise the support currently on offer from the government, we stress the importance of agreeing to a fixed contract.

If you are on a variable or deemed rate tariff you could be missing out on the same savings as business customers on fixed tariffs. This is because your prices, whilst they are going to be discounted are still going to fluctuate depending on market developments.  This leaves your business vulnerable to paying higher prices if the wholesale prices go above the government’s maximum discount.

If you are a current customer and need advice or would like to renew your contract, please get in touch with your account manager or contact us on 0800 170 7670

If you are not a current customer but need an energy contract or would like to speak to one of our consultants, then please get in touch today, and ensure the maximum support for your business over the next six months.