Fixed vs. Variable Energy Tariffs: Which is Right for Your UK Business?

March 20, 2025 by Admin

Managing energy costs is a critical aspect of running a successful business in the UK. Fluctuating energy prices can significantly impact your bottom line, making it essential to choose the right energy tariff. Understanding the differences between fixed energy tariff options and variable energy tariff options is crucial for making an informed decision that aligns with your business’s risk tolerance and financial goals.

This guide breaks down the pros and cons of each, helping you decide whether the stability of a fixed deal or the potential savings of a variable tariff better suits your commercial energy needs.

 

Understanding the Basics

Before diving into tariff comparisons, it’s crucial to understand your business’s energy usage profile. Analyse your past energy bills to identify peak consumption periods, seasonal variations, and specific equipment or processes that consume the most energy.

This detailed understanding will help you accurately estimate your future energy needs and choose a tariff that aligns with your business’s unique requirements. Consider factors such as operating hours, the number of employees, the type of equipment used, and the overall size of your premises. Understanding these factors will not only assist in choosing the right tariff but also in identifying potential areas for energy efficiency improvements.

Let’s define what we’re going to be talking about in this article:

Fixed Energy Tariff

With a fixed tariff, the price you pay per unit of electricity (kWh) and gas (kWh) remains the same for the duration of your contract (usually 12, 24, or 36 months, and often longer for businesses). Your monthly bill may still fluctuate depending on your business’s energy usage, but the rate you pay won’t change during the agreed-upon period. This provides predictable costs for budgeting purposes.

Variable Energy Tariff

A variable tariff means the price you pay per unit of energy can go up or down depending on market conditions. These tariffs often track market indices or the energy price cap (though the cap applies primarily to domestic customers, its fluctuations still influence business tariffs). For more information on the UK energy market and regulatory environment, visit Ofgem. Your bill will change in direct correlation with these fluctuations.

 

The Allure of Fixed Tariffs: Stability and Predictability for Business

Fixed energy tariffs are frequently the preferred choice for businesses that place a premium on predictable costs and efficient budget management.

A significant advantage is the price security they offer. One of the biggest draws of a fixed tariff is knowing precisely what your business will be paying for its energy over a set period. This protects against unforeseen spikes in the energy market, which can be particularly devastating for companies operating on narrow profit margins.

This price predictability also facilitates effective budgeting. With predictable energy bills, businesses can budget and forecast expenses with greater accuracy, a critical aspect of financial planning, securing loans, and making informed investment decisions. Resources, such as budgeting tools offered by the Federation of Small Businesses (FSB), can further assist in this process. In addition, fixed tariffs simplify cost management.

By eliminating the uncertainties associated with fluctuating energy prices, businesses can dedicate more time and resources to core activities and growth initiatives. Moreover, comparing the unit prices of various fixed-rate tariffs is generally straightforward, making it easier to shop around and identify the most favourable energy deal for your business.

However, it’s important to acknowledge that fixed tariffs also come with potential drawbacks. For example, you could face missed savings. If energy prices drop significantly during your fixed-rate contract, your business won’t benefit from those lower prices until the contract’s conclusion, potentially leading to higher expenses compared to a variable tariff.

Another factor to consider is the possibility of incurring early termination fees. Many fixed tariffs designed for businesses include substantial early termination fees. Should your business need to close or relocate before the contract’s end, you could face significant penalties. Reviewing business rights and responsibilities regarding contracts on GOV.UK – Running a Business is highly recommended.

Finally, while stability is a key feature, it’s worth noting that fixed tariffs are not always the cheapest. Because the price reflects a prediction of future energy costs, suppliers often incorporate a buffer for potential increases, meaning that fixed rates might not always represent the lowest available option.

 

Factors to Consider for Your Business

So, how do you decide whether a fixed or variable energy tariff is right for your business?

• Risk Tolerance: Is your business comfortable with the possibility of price fluctuations, or do you prefer the stability of a fixed price? If your business operates on tight margins and needs predictable costs, a fixed tariff is likely the better choice.
• Budgeting Needs: Does your business require predictable energy bills to manage cash flow effectively and forecast expenses accurately? If so, a fixed tariff is recommended.
• Energy Consumption: What is your business’s energy consumption profile? Businesses with predictable energy usage may benefit from fixed tariffs, while those with flexible operations may be able to take advantage of variable tariffs.
• Market Outlook: What are the current trends in the energy market? Are prices expected to rise or fall? Staying informed about market forecasts can help you make a more informed decision. Consider industry insights from The Energy Institute.
• Contract Length: Consider the length of the fixed-rate contract. A longer contract provides greater price security, but it also locks you in for a longer period, potentially missing out on savings if prices fall.
• Early Termination Fees: Carefully evaluate the early termination fees associated with fixed-rate contracts.
• Business Type: Certain business types (e.g., energy-intensive manufacturing) may benefit more from the price certainty of a fixed rate, whereas others (e.g., office-based businesses) might tolerate the risk of a variable rate in exchange for the potential for savings.

 

Risk Vs Price Example

Here is a real world example, to help you understand better. Let’s say you run a small manufacturing business in the UK:

Scenario 1: Risk Averse

You prioritise predictable costs and reliable budgeting. You opt for a 36-month fixed tariff with a unit price of 25p/kWh for electricity and 6p/kWh for gas. You know exactly what you’ll be paying for the next three years, allowing you to accurately forecast expenses and manage cash flow.

Scenario 2: Price Sensitive

You’re comfortable with some risk and want to take advantage of potential price drops. You choose a variable tariff that tracks a relevant market index. Initially, the unit prices are slightly lower than the fixed tariff (23p/kWh for electricity and 5.5p/kWh for gas). If prices fall, you’ll save money. However, if prices rise above the fixed tariff’s rates, you’ll pay more, potentially impacting your profitability.

 

The Fine Print In Business Energy Contracts

Before signing any business energy contract, carefully review the fine print and understand all the terms and conditions. Pay close attention to clauses related to price changes, contract renewal, termination fees, and dispute resolution.

Ensure that the contract clearly outlines the supplier’s obligations and your business’s rights. If you’re unsure about any aspect of the contract, seek legal advice from a qualified solicitor. Understanding the key clauses in your energy contract will help you avoid potential misunderstandings and ensure that your business is protected.

Specifically, pay attention to auto-renewal clauses, which can lock you into unfavourable rates if you’re not careful.

You can find out more about different business energy contracts and what they mean in our article here.

 

Finding the Best Energy Deal for Your Business with Tariff

Finding the best energy deal for your business is directly tied to your specific circumstances and operational needs, and that’s precisely where Tariff.com can assist. We strive to make energy tariff comparison a simple and straightforward process for UK businesses.

At Tariff.com we provide personalised recommendations, helping you pinpoint the most affordable energy tariff options based on your business’s location, specific energy usage patterns, and unique industry requirements. We offer up-to-date information on prevailing energy prices and the latest market trends, empowering you to make well-informed decisions that align with your business goals.

Once you’ve identified the right tariff, Tariff.com simplifies the often complex process of switching suppliers, ensuring a seamless transition for your business. Don’t postpone addressing potentially inflated energy bills; begin comparing tariffs today to secure the best energy deal for your operation.

Regardless of the specific energy tariff you choose, several steps can be implemented to reduce your business’s overall energy consumption and lower associated bills. Conducting regular energy audits is a vital initial step, enabling you to identify areas where your business can improve its energy efficiency.

Ultimately, the decision between a fixed and a variable energy tariff is a critical one for UK businesses. By carefully analysing the pros and cons of each option, thoughtfully considering your business’s unique needs and risk tolerance, and utilising resources like Tariff.com to compare available options, you can make a well-informed decision that reduces overhead and enhances your bottom line.

Begin your energy tariff comparison today to secure the best energy deal for your business with our knowledgeable team today.