The unavoidable cost of energy
There’s been loads of interest over the last few years about energy prices, certainly since the Ukraine / Russian conflict energy prices rocketed. Whilst domestic consumers suffered some of the largest price increases since the 1970’s, most were cushioned from the volatile wholesale costs.
Businesses however, suffered the most with energy costs sometime going up as much as ten times previous prices! And whilst the Government had some support for businesses, there has been no price cap like domestic consumers enjoyed. (Not sure we enjoyed rising prices that much!).
In this blog, I’ll discuss what we see across our client base, including some pitfalls to avoid and where we have found savings to be made.
The domestic market - running a business from home
First of all let’s look at the energy market, the difference between business and domestic supplies and the VAT rules that also apply.
Generally speaking, if you run your business from home, even if it’s in a separate space, building or even a shed; then it’s highly likely you’re on a domestic energy supply. Like any other domestic user, you are protected by the energy price cap (assuming you are on a Standard Variable Rate Tariff). You’ll also pay 5% VAT on all of your electricity, gas, oil or LPG supplied to you irrespective of how much you use. You also have the option of the various other tariffs on the domestic market, but ultimately regulation protects domestic consumers more than business.
We’re often asked about reclaiming the cost of home energy against the business. Every circumstance is different, however unless you separately meter the energy used for your business you can’t claim the cost directly. Your accountant will usually put through a tax relief claim for ‘use of home’, do keep copies of all your bills to help support this claim – you might be asked to prove the expense incurred and how it was calculated.
From a cost point of view, if you’re running a business from home you should keep an eye on which is the best tariff to use. Now the energy market is stabilising, we’re starting to see more competition between suppliers but don’t be taken in by the hype, factor in how you work & live in your home.
Every home is different, so it’s impossible to give a one-size-fits-all answer. The easiest way to look for the best value is to do some homework first as you can only work with what you’ve got! So, look at what fuels you actually use – electricity, gas, oil, LPG etc. Then look at you current usage, not the price but that actual amounts used and when. This might mean you’ll need to dig out previous bills or statements, it could mean you’ll need to take some meter readings regularly over the next month or two.
Work smarter not harder
Some suppliers can give you a breakdown of usage right down to every half an hour if you have a smart meter, others might only be able to give you a monthly bill. By taking your own readings you’ll be able to work out how much you use every day or week. Next look at your home, how do you consume the energy and when? Could you shift some of that use to different times of the day or night? Do you have energy hungry appliances or electric vehicles? Some energy suppliers will give you cheaper rates if you can move your usage around, or give you free electricity in return for using it at certain times.
If you purchase oil or LPG you may be able to secure lower prices by being part of a buying group, unfortunately the market is so volatile that even bulk pricing gives very little discount now. Heating oil and LPG is also pretty much an unregulated market therefore you are at the mercy of whoever you choose to supply your products.
For electricity, work out what times of day you use the most energy. Is it even throughout the day? Or do you use more at night due to storage heaters or hot water tanks, or do you have certain peaks of use due to family life? Most domestic energy companies offer time or use (TOU) tariffs, many will know an earlier type of this called Economy 7. The advent of smart meters has brought in the possibility of many more TOU tariffs, some of which offer half hourly wholesale linked pricing such as Octopus Agile. Octopus also offer Tracker, a single rate tariff for gas and / or electricity that follows the wholesale day-ahead rate.
The best way to choose an energy tariff is to compare the actual unit rates for your usage not the monthly estimates. The lower the unit charge, the less you will pay for energy but be careful, TOU tariffs can work out expensive if you use energy at the ‘wrong’ time. If all this sounds complicated then you’re right, it is! But do your own homework, what is right for you won’t be right for your neighbour (or everyone on Facebook).
One final note about domestic energy, most people assume you have to pay a fixed amount by direct debit every month. This is useful to help budgeting but it can mean you either build up a large credit or worse still a large debt and not realise. Most energy companies offer whole bill direct debits, in other words you only actually pay for what you use. Well worth considering and to do this you’ll probably need to call your energy company, very few offer this option automatically.
If you’re running your business from home you don’t need to tell your energy supplier and it’s not recommended to change to a business energy supply, you’ll see why later on. But, if you do have a separate workshop or building and want to claim your exact energy usage, then you could consider fitting a separate meter. Sometimes called a landlord meter, this is purely for your own use and helps you work out exactly what to attribute to your business. A qualified electrician can help you with this and usually just takes half a day or so to fit.
At your office or workshop
So, for those that have business premises of any size, you’ll either be paying your landlord for your energy use or responsible for it yourself. Which every option it is, one thing is for sure – it’s likely to be more complicated and more expensive than your home energy supply.
Let’s cover one thing first – brokers, sometimes called energy advisors. We do not advocate the use of energy brokers at all, whilst they may save you a little time upfront, many charge fees that massively inflate your bills. Unfortunately some brokers aren’t always as clear as they could be in how they earn their money. Some might charge an upfront fee, whereas others add their commission to each unit of energy your consume.
We’ve seen a community centre where the bills have been inflated by £2500 or more per year, just for using a broker. Their actual energy price would have been lower had they gone direct to their supplier, the extra fees were for services like invoice validation, energy efficiency advice and customer service. In this case I found out that invoice validation wasn’t being carried out on all bills and, after a lengthy complaint, the Energy Ombudsman awarded £150 for service failures.
Like any business, a broker charges a fee for their work and if they undertake that work they should be paid. Unfortunately brokers effectively hide their fees in the unit rates of the energy you are buying, meaning your fee is directly linked to how much energy you consume. Their commission is effectively uncapped and can be as high as 20% of your unit rate on both gas & electricity.
We’ve also seen some charities and community groups being taken in by the lower rate of VAT and the way brokers have ‘sold’ contracts. All businesses that use less than 33kWh electricity and 145 kW/h of natural gas per day are automatically rated at 5% VAT, this is usually averaged over one month. Registered Charities can claim the reduced rate where fuel and power is supplied for a qualifying use, irrespective of the amount of energy used.
Many charities used to understand that qualifying use was anything related to the activity of the charity. This definitely is not the case and charities, especially those running community centres, should be mindful of this. Whilst no one likes paying tax, claiming a lower rate of VAT is merely storing up problems and expense for the future. If you’re unsure about this, speak to your accountant or professional advisor.
Deal or No Deal?
Another factor to consider on business energy is very volatile, there is no price cap and outside of a fixed rate deal you can expect to be subjected to higher standing charges and energy costs. Whilst many think energy companies use a particular sales tactic of ‘the deals might change tomorrow’, this is actually how the energy market is designed to work.
Wholesale markets will buy and sell energy throughout the day for intraday, day ahead and future dates. These deal are based on availability, purchase volumes, global pricing and currency fluctuations. Fixed rate products might be limited in volume, so once it’s gone it’s gone! They can also be linked to a particular future purchase of gas or electricity, so prices are only guaranteed up to the end of the current day.
Because of the volatility, nearly all energy companies will push fixed deals to business customers. Not only does it give them a known profit margin, it also give their customer surety of pricing for a set period. However, it also locks businesses into energy deals that might be overpriced, unaffordable and inflexible. You should certainly consider fixed rates for the product they are, like mortgage rates – they will protect you for price hikes but you can’t get out of them easily. The Ofgem website gives lots of information about business energy pricing and help navigating the market. https://www.ofgem.gov.uk/energy-advice-businesses
If your business is energy intensive then surety of pricing is what you’ll likely need. You’ll know what to factor into your output costs for a set period, you’ll also be able to manage spend according to use. Even a lean energy business like an office will still benefit from fixed pricing but may be in a better position to use dynamic tariffs.
I mentioned earlier about TOU tariffs, in the small business sector these are just as common although traditionally they have been Economy 7 style rates. You will find some 3 rate TOU tariff metering in larger locations but these are often not supported by every energy provider. With the advent of Smart Meters in some small locations, this has led to some companies reintroducing TOU tariffs to their portfolio. These tariffs are worth considering depending on your business, and in many cases if you can avoid peak hours (usually 4-7pm) you might save some money.
Our office is supplied by Octopus Energy and we trialled the electricity tariff Shape Shifters as most of our use is between 8am & 5pm, we just hit peak times in the last hour of the workday. Even without doing anything different, our electricity costs fell by almost 20%. When we added in turning lights down and cutting use at the end of the day we did save a bit more.
Choose wisely
Whatever you choose, make sure you do your research thoroughly, using these tips to help you:
Avoid brokers and energy price aggregating sites, there will be a cost to this.
Shop around both online and by phone but always have a recent bill to hand so you can compare prices properly.
You may have to give notice to your current supplier, make sure your new supplier doesn’t take over until the end of your notice period.
Always take photos of your meter readings, you will need these for any dispute or on change of supplier.
If you are a charity, make sure your energy VAT rate is correct. Ask your accountant for help with this, HMRC guidance changed a few years ago and could catch you out.
Remember that there are no ‘cooling off’ periods for business energy contracts, once signed and returned you are agreeing to those terms – not the ones the agent told you about. Make sure you read and understand every page, don’t just sign.
Some suppliers will ask for a deposit, this is normal practice but keep a record and ask for it back if you move supplier.
Consider whether a different tariff (Smart, TOU etc) would be better, ask your supplier what options they can support.
If you have onsite generation, consider both import & export energy pricing some providers offer differential pricing if you split supplies.
If you site has more than one meter point, can these be combined to save standing charges? Ask an electrician or gas fitter to look at this for you. The cost of works might be offset in the long run.
Does the energy provided meet with your carbon policies? Some businesses will need to report their carbon use and energy is a big part of this.
Above all, like any business contract, don’t be taken in by the sales pitch. It’s amazing how many businesses will be blinded by fancy websites and talk of cheap prices. Talk to other businesses, your advisor or accountant to see who they might recommend. We use Octopus Energy, if you’d like to share in £100 then use our referral link. But only sign up if this is the right deal for you!
Finally, if your in a premises where your energy is factored into your service charge do check regularly that you are not being overcharged. Where you are being recharged for energy, ask to see a copy of the bill and how your readings have been calculated. If it’s included in a service charge, make sure you’ve seen a breakdown of everything included in the charge. Never be afraid to challenge something that doesn’t look right.