If we are trying to differentiate between business electricity and residential electricity, we need to understand that business electricity revolves around a business-to-business model, whereas the residential electricity provision revolves around the business-to-customer/consumer model.
Many people (who understand the concept of economies of scale) know that business electricity is cheaper than residential or domestic electricity. For those who are alien to the concept of economies of scale, in simpler words, it refers to the concept of availing of discounts by buying in bulk.
Businesses can only do it because when you buy in bulk, the cost is also high, and only businesses can afford that much quantity and cost structures. Businesses take upon this mainly because they need more electricity than domestic users to get their operations working, or they would lose out on a lot of business.
Nature of business contracts:
When all is said and done, there might be instances in which business electricity might not be cheaper than residential electricity. Business electricity is consumed based on long-term contracts, and either party cannot breach these contracts.
In many countries around the world, however, electricity has become a big defaulter because it is an essential commodity for businesses and is necessary for their survival. If circular debt exists in that particular economy, businesses and domestic consumers will face electricity issues.
These contracts can take two forms. They can either be fixed in nature, and the electricity suppliers would then give you one rate which would stay fixed despite all the changes in the prices of electricity, be it a positive or a negative one.
On the other hand, we have flexible contracts. These prices would change with the changes in the prices in the market. It entirely depends on the capacity for risk-taking that a business has.
If they can afford to take the risk of making flexible contracts because they believe they can predict future electricity prices, then they can indulge in it. Fixed contracts tend to work best for those businesses that want more stability and less risk-taking while budgeting their costs for any given time.
Electricity rates for businesses in the UK
If we confine ourselves to the UK only, electricity for businesses is much cheaper than electricity for domestic users. We need to know the electricity rates for businesses. Electricity for business and their rates tend to vary for small businesses, medium businesses, and large-sized businesses. Listed below are the electricity rates for all types of businesses.
- Extremely small-sized businesses: Businesses of this size tend to pay around 17.16 pence per kilowatt per hour.
- Small-sized businesses: Businesses of this size pay around 15.43 pence for every Kilowatt per hour.
- Small to medium-sized businesses: Businesses of this size pay lower than small-sized businesses and around 14.33 pence per kilowatt per hour.
- Medium-sized businesses: These businesses pay lower than small to medium-sized businesses and around 13.2 pence per kilowatt per hour.
- Large-sized businesses: These businesses pay lower than medium-sized businesses and around 12.90 pence per kilowatt per hour.
- Slightly larger-sized businesses: These pay even lower than large-sized businesses and around 11.80 pence per kilowatt per hour.
- Extremely large-sized businesses: These pay the lowest of them all and around 11.70 pence per kilowatt per hour.
So, we can see that as the size of a business increases, the electricity rates for businesses also tend to fall, and that is entirely because of their ability to adopt economies of scale.
Establishing averages
For a fairer viewpoint, we need to base our decisions on averages. On average, businesses consume electricity at a rate of 13.48 pence for every kilowatt per hour.
On the other hand, if we compare it to domestic consumers, they consume electricity at a rate of 17.37 pence per kilowatt per hour. So, without a doubt, businesses consume electricity at cheaper rates than residents in the UK do.
Variability of tariffs
In the case of electricity, the tariffs depend on the time of use as well. There are peak hours in which the rates are also high as many people are using electricity at that time. On the other hand, there are off-peak hours.
During this time, the tariffs are slightly lower because many people do not use enough electricity at this point.
So, in the case of a business, they can save a lot of electricity costs if they somehow manage to control their operations in such a way that they work more during the off-peak hours. So, it somewhat depends on the type of business at hand.
Other factors
1. Location of business:
Businesses in big cities in the UK tend to avail of cheaper electricity rates because they offer a location advantage. They tend to avail major chunks of economies of scale.
2. Rating of credit:
If you are not a defaulter and have lower trade payables on your balance sheet, then the chances are that your supplier would offer you lower rates than other businesses with a worse credit rating.
3. Size of business:
As established already, as the size of the business increases, the electricity expense starts spreading over more fixed units, and the cost falls.
4. Period of contract:
If the contract was signed for an extended period, then the chances are that your business will be offered much lower rates than had you signed up for a short-term contract.
5. Criteria of pricing:
The pricing criterion is a lot more intense for businesses than domestic consumers as well, and it determines the rates of electricity being offered. Every other individual cannot understand the complexity.
6. Taxes:
The government of any country tends to put a lot more taxes and levies on electricity consumed by businesses than domestic consumers as they want to offer some relief to them.
When all is said and done, it can be analyzed that business electricity is cheaper than domestic electricity.
The relations that you have with your suppliers are strong determinants of your stand on this particular statement.
Some suppliers tend to offer a lot more discounts than others. So, it is essential to choose your business partners and suppliers wisely and efficiently.
