Business electricity explained: What every business needs to know

You didn’t get into business to wrestle with electricity bills, but knowing what you’re using and how to manage costs is more important than ever.

Volatile prices and uncertainty are hardly ideal conditions for your business to work in, especially if you’re pushed for time and don’t feel confident navigating complex energy markets.

We’re here to explain the fundamentals behind business electricity costs, what makes up your bill, why prices rise and what you can do about it.

In this article:

• Learn the basics of business electricity.
• Understand what makes up your business electricity bill.
• Discover practical ways to manage your electricity costs.

What is business electricity?

Business electricity works very differently to household electricity.

The most notable difference is that business electricity users are not shielded by Ofgem’s energy price cap, one of the main protections afforded to domestic users.

That key difference changes so much of your strategy.

Your business is responsible for understanding its bills, exploring its options and weighing up contract types, including the pros and cons of each.

Ultimately, you need to make decisions that could affect your bottom line for years to come.

We know that sounds daunting. That’s why Troo exists: to simplify business energy for you.

What makes up your business electricity bill?

Your electricity bill consists of multiple parts that can be broken into two major categories.

Wholesale electricity - 40%

Did you know less than half of your typical monthly electricity bill goes towards paying the cost of electricity?

The precise split will vary for different businesses, but the principle remains: you pay for more than just electricity on your bill.

Wholesale electricity is the product itself. It is the physical power that makes your lights and sites operational. You are covering the cost of the electricity purchased by your supplier.

Non-commodity costs - 60%

The remainder of your bill covers a range of non-commodity costs and other charges that aren't always immediately clear.

Examples of costs beyond wholesale energy include:

• Standing charges: Fixed daily charges that go towards paying for network maintenance and infrastructure.
• Taxes and levies: VAT is applied at 20% for many businesses, plus other relevant taxes and levies, though exemptions apply.

There are lots of moving parts in an energy bill. Some are fixed; others are variable.

Take time to understand what you’re paying as a crucial first step towards managing your costs.

What affects business electricity prices?

Wholesale electricity prices tend to revolve around the basic principles of supply and demand.

• When electricity supply outweighs demand = prices are likely to fall.
• When electricity demand outweighs supply = prices are likely to rise.

Specific factors that impact supply/demand and pricing overall include:

• Geopolitical conflict: Geopolitical events have been a major driver of energy price volatility in recent years. Russia’s invasion of Ukraine and US-Iranian conflict have each contributed to a constrained supply, leading to higher costs.
• Weather: Extreme or unexpected weather can affect both energy demand and renewable generation. For example, low wind can reduce wind generation, while cold weather can increase demand for electricity and gas.
• Network and policy costs: The costs of maintaining and operating the electricity network, alongside government schemes and other policy costs, also form part of your bill.

You can't control everything that influences electricity prices. However, you can control how you respond to those changes and mitigate the impact of volatility.

How to manage your business electricity costs

You can control what you pay for your business electricity by pulling two main levers:

• Usage: You ultimately pay for what you use. Use less, pay less. This doesn’t mean you need to switch off all the lights and hope for the best. But it may be time to perform an energy audit to identify efficiency savings that don’t impact performance.
• Procurement: You can't control the market, but you can control how and when you buy your energy. The cheapest unit rate isn't always the best option for every business, so consider your contract length, risk appetite, payment terms and future energy needs alongside price.

When should you renew your business electricity contract?

Unlike domestic electricity bills which roll over onto a variable rate limited by the Ofgem energy price cap, businesses could face tough penalties or roll onto unfavourable terms if their contract expires without a renewal or new deal.

Business electricity contracts can have specific renewal and notice periods, so it's important to check your terms well before your current deal ends.

Depending on your contract, you could move onto an unfavourable out-of-contract or deemed rate if you don't agree a new arrangement.

You should understand your usage, current terms and business priorities before your renewal window opens to hit the ground running and give yourself the best shot at securing the right contract.

How we can help

Business electricity is complex. We get it. We can support you.

Troo exists to help businesses make sense of their energy needs. We simplify information and help you make smart decisions that manage costs and lead to real change.

We are not here to sell you a quick fix. We're here to understand what matters to you, offer clear advice, and take ownership of the hard parts, so energy becomes one less thing to worry about.

Book a free energy health check today for practical advice on business electricity, gas and water procurement, renewable consultancy and our ongoing management services.