Electricity network companies’ exceptionally high profits are set to add £20 to household energy bills this year, despite regulator Ofgem introducing a new regulatory regime designed to control profit margins, a report finds.
The analysis, from the Energy and Climate Intelligence Unit (ECIU), finds that in the first year of the price control mechanism known as RIIO, the six distribution network operators (DNOs), the firms that operate regional power networks, posted an average profit margin of 30.4%, with average dividends at 13.3%.
If DNOs continue at the same level of profit margins this year, that will make the average annual household electricity bill about £20 higher than if their profits were at a similar level to those of the ‘Big Six’ energy firms. Network costs now make up more than a quarter of the average domestic electricity bill, a share that is set to rise in coming years.
Commenting, Richard Black, director of the ECIU, said that the findings should open up the debate around energy bills.
“Ministers, the press and the public are rightly worried about energy bills, and the news that these monopoly operators are making profits beyond most companies’ wildest dreams will only add to these concerns,” he said.
“We are currently in the middle of what the former head of National Grid has calleda revolution in the way our electricity is produced and supplied. It’s essential therefore that we have an open, honest and transparent debate about the costs of every part of the energy system.”
An ECIU report last year found that DNOs made annual average profit margins of 32% over the previous six years, equating to about £10bn on the nation’s collective energy bill over six years (2010-15), or around £27 per home per year. The DNOs argued that the introduction of RIIO would change this picture: ECIU’s new report suggests that, from the evidence available, RIIO has made no impact on profits or dividends.
These findings add further weight to calls from Citizens Advice for network companies to return excess profits to customers. The 2017 report Missing Billionsshowed that consumers are set to overpay by £7.5 billion during the current RIIO period.
Commenting on the report, John Penrose, MP for Weston-super-Mare, said:
“Ofgem has admitted it was asleep at the wheel on energy price caps. Now it has a chance to do better by using its powers to take on the monopoly Distribution Network Operators (DNOs) which own the power lines that get energy to our homes.
“The DNOs are low risk, monopoly businesses. But they have even fatter profit margins than the Big 6 energy firms, all paid out of the pockets of hard-working energy customers.
“If Ofgem lets them go on getting fat at energy bill-payers’ expense, it should be scrapped and replaced with a proper cross-sector regulator that isn’t afraid to use its teeth.”
Prof Catherine Mitchell, Professor of Energy Policy at the University of Exeter, highlighted the ‘vital role’ that DNOs have:
“DNOs have a vital role in the transition to the energy systems of the future, connecting and managing the distributed, democratised, low-carbon network to ensure that consumers can benefit from the plummeting costs of renewables. However, whilst many of the firms deserve credit for their work in promoting the transition to smart power networks, Ofgem’s failure to corral companies in the right direction – with these high profit margins appearing instead – places the shift to a modern, flexible grid at risk,” she said.
“Overall annual benefits from this switch to smart grids have been calculated to be as high as £8 billion for the UK. This is on top of cleaner air, reduced dependency on fossil fuel imports and a reduced need to push through technologies that the public doesn’t want, such as fracking. This report again highlights the urgency of the challenge facing Ofgem and the DNO companies, and has rightly resulted in fresh calls to tighten up the ship.”
The report, RIIO Carnival: How new Ofgem regulations are failing to hit high network company profits, is available here.
Energy bills have doubled in Britain over the past decade to an average of about £1,200 a year
Energy regulator Ofgem has said that a plan to cap standard variable energy tariffs for millions of British households could be in place by Christmas this year.
In October, Prime Minister Theresa May pledged to introduce legislation to end “rip-off” energy prices by putting a price cap on bills.
Speaking to a parliamentary select committee on Wednesday, Ofgem chief executive Dermot Nolan said that for a cap on energy bills to come into force by the end of the year it would need to become law before politicians and lords break up for the summer recess in July.
Once that law is passed, Ofgem will need to launch a statutory consultation process of around 50 to 60 days, after which energy suppliers will be given a further grace period to implement the necessary measures.
The Business, Energy and Industrial Strategy Committee was questioning Mr Nolan as part of its pre-legislative scrutiny of the Government’s draft bill to cap energy prices.
Annual energy bills in Britain have reportedly doubled over the last decade, rising by about £1,200 per household.
Figures from Ofgem show that 57 per cent of households – or around 13 million – are on standard variable rate tariffs which are typically the most expensive. They are the basic rate that energy suppliers charge if a customer does not opt for a specific fixed-term deal.
Mr Nolan said that vulnerable customers had been failed by the system and admitted that Ofgem should have done more to help them earlier.
“I accept we should have done better with vulnerable customers,” he said.
Committee chairwoman Rachel Reeves accused Mr Nolan of acting “like a bystander rather than an active participant in the market” and challenged him over Ofgem staff bonuses which reportedly totalled £921,000 for the 2015/2016 tax year.
“Your role is not to hope that next year fewer people are paying more than they should be on standard variable tariffs, but to stop this exploitation of customers,” she said.
Mr Nolan said that bonuses were calculated according to civil service guidelines.
Ofgem confirmed to The Independent that Mr Nolan and other members of the executive board did not receive a bonus for the 2016/17 tax year.
Ofgem is introducing a safeguard tariff in February that will help protect around a million vulnerable customers from overpaying on their energy bills. The regulator has said that it plans to extend the scheme to two million more households next winter.
Data also published by Ofgem in December showed that among Britain’s “Big Six” energy suppliers, SSE had the largest percentage of customers on SVTs at 71 per cent.
British Gas, owned by Centrica, had 67 per cent of its customers on SVTs and E.ON had 61 per cent.
The country’s other three main suppliers are EDF Energy, Innogy’s Npower and Iberdrola’s Scottish Power.
Businesses are dramatically changing the way they buy energy in Britain and beyond as new technology makes it easier and cheaper to generate their own power.
Home furnishings giant Ikea Group now gets almost half of its U.K. electricity from renewables, while Toyota Motor Corp. taps solar energy to build engines in Wales. Australian bank Macquarie Group Ltd. will unveil on Wednesday a service to help businesses cut energy costs and pollute less, competing with existing suppliers including Centrica Plc.
More and more British businesses are seeking to save money by using locally sourced power, sidestepping utilities and sparking a global market for decentralized energy that’s expected to expand more than 50 percent to $110 billion by 2021. That shift threatens to cut revenue at the biggest traditional power providers, which typically control everything from generation to distribution.
“The Big Six are going to have to significantly change the way they operate,” said Nick Boyle, chief executive officer of Lightsource Renewable Energy Holdings Ltd. in London. “It’s going to be a challenging time for them. They are aware they need to reinvent themselves.”
In so-called distributed generation, power plants are connected to a local network, cutting the costs associated with using the main grid. Companies can also reduce expenses through energy efficiency measures, which can save business consumers 3.9 billion pounds ($5.2 billion) a year in the U.K. alone, according to the Policy Exchange research group.
Macquarie, which bought the U.K. government’s Green Investment Bank Plc in August, will offer companies financing for new generation and energy saving equipment under supply contracts that may be as long as 15 years and have no up-front costs, said Richard Braakenburg, senior vice president of the energy unit. Traditional energy supply agreements usually last one to three years.
Providing the capital up front entices companies to embark on measures they might otherwise put off and the bank’s willing to work alongside traditional utilities, said Braakenburg. “You can bring forward a whole chunk of the investment program rather than having it drip fed.”
Distributed energy and consumption savings go hand-in-hand with efforts to tackle climate change. In Britain, the government is legally obliged to reduce emissions by 80 percent from 1990 to 2050 using a succession of five-year “carbon budgets.”
In Europe, renewable-energy developers are being forced to find new customers as lower subsidies from governments squeeze their profit. The cheaper green technology has encouraged more companies to invest in their own generation and efficiency programs.
In the U.S., a key driver of the trend has been companies like Google and Amazon.com Inc. seeking to demonstrate their shift to cleaner activities, said Bruno Brunetti, head of power strategy at S&P Global Platts. Enel SpA, Europe’s biggest utility by market value, started work earlier this month on a wind farm in Nebraska to power a new Facebook Inc. data center.
“Back in the days a utility had absolute control from generation all the way down to retail,” Brunetti said. “Things are changing as end-users are getting more proactive.”
Globally, the market for distributed generation will expand by 9.5 percent a year through 2021 from about $70 billion in 2016, according to a report byBCC Research LLC, an energy analysis company based in Wellesley, Massachusetts.
Ikea plans to be “energy independent” by 2020 and globally plans to spend about 2 billion euros ($2.4 billion) to achieve that target, said Hege Saebjornsen, U.K. and Ireland country sustainability manager. The retailer is already selling energy solutions to its own customers.
But all isn’t lost for Britain’s existing utilities, according to Centrica, the biggest household energy supplier. The utility, which issued a profit warning last week, has responded to the changing market with longer-dated contracts to satisfy customers insisting on bigger cost savings than they’ve enjoyed in the past, including help with finance for new equipment and generation.
Utility profit margins for decade-long contracts can be closer to 10 percent than the near-zero level on some traditional supply agreements, said Gab Barbaro, managing director of Centrica’s British Gas Business unit. And that’s after the energy supplier and business or government customer share cost savings between them, he said.
“It’s all about volume and energy efficiency,” Barbaro said. Traditional contracts have been “done to death.”
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Britain’s “big six” energy providers are feeling the heat. Theresa May’s pledge to end “rip-off” fuel bills could lead to a cap on the standard variable tariff paid by a majority of households in the UK. The sector is likely to face a more radical shake-up, should Jeremy Corbyn’s Labour party come to power.
Power suppliers are showing considerable agility in countering the immediate threat of regulation. Two of the biggest, SSE and Npower, are to spin off and combine their UK retail businesses to reduce their exposure to the market. Now Centrica, the parent of British Gas, has said it will scrap its standard variable tariff, replacing it with an “emergency” 12-month default tariff for customers who fail to shop around for a cheaper fixed-price deal.
Whether regulators step in, or whether companies act to pre-empt them, it seems plausible that the gap between the cheapest and most expensive tariffs will narrow, and that price-savvy customers will no longer receive such a large cross-subsidy from the apathetic majority as they have in recent years. It is questionable whether consumers need such protection from their own inaction. But even if there is little change in the average household bill, there is a real benefit in making people more confident that they are paying a fair price for energy.
Public trust in the system is especially important because the UK, like countries worldwide, is grappling with the problem of how to fund the necessary switch to clean energy. At present, there is a damaging lack of transparency over the costs of this transition.
Centrica’s chief executive, Iain Conn, argues that “green taxes” and other government policies that are funded through levies on energy suppliers are the main cause of rising household bills. He and others in the industry want the government to end this practice and meet the costs from general taxation. He has a point.
The true cost of UK policies to support green energy is hotly contested. Centrica says environmental and social policies accounted for £135 of an average power bill of £1,112 in 2016. Independent analysts, and the government’s own advisers on climate change, have different forecasts suggesting the costs are much lower. A great deal depends on the timeframe selected, how one accounts for the carbon tax and whether one factors in renewable energy’s impact in lowering wholesale prices.
A recent review of UK energy costs by the economist Dieter Helm suggests that UK households in fact pay less than the European average for energy — and less on taxes and levies. But green subsidies are significant and they have been higher than initially forecast: a “levy control framework” introduced in 2011 was supposed to cap the costs of three of the main schemes supporting low carbon investment, but costs are likely to exceed the cap in every year to 2021. The Helm review argues it would have been possible to achieve as much at lower cost.
At a time when poorer households are struggling with stagnant wages, cuts to benefits and rising prices for food, transport and other essentials, it will not be surprising if they begrudge paying for decarbonisation policies. Nor is it surprising that energy suppliers resent being blamed for high prices when the government has failed to regularly quantify and explain the impact of its green policies on household bills.
If the government is to win public support for the essential transition to cleaner energy, it must begin with greater transparency over the costs of its policies. Only then can it justify the costs and determine the fairest way to meet them.
SSE and npower, two of the UK’s biggest energy companies, are planning to combine their household energy supply businesses in a potentially seismic shake-up of the market.
The two firms said they were in well-advanced talks to create a new independent energy supply firm. The new business would combine the nearly 13 million customers they currently supply with electricity and gas.
If the move goes ahead it would see the end of two of the biggest brands in the energy retail market, and is likely to raise competition concerns as the so-called big six that own 80% of the energy market shrinks to the “big five”.
The combination of German-owned npower and UK-listed SSE, Britain’s second biggest supplier, would create a behemoth of a similar size to the current market leader, British Gas.
SSE’s share price jumped by more than 3% as the possible deal was announced.
Both companies have opposed the government’s plans for a price cap on energy prices, which Theresa May has said she is imposing to end “rip-off” standard variable tariffs. Among the big six, SSE has the highest percentage of customers on such poor-value tariffs.
The firms said the new company would be listed on the London Stock Exchange but stressed no final decisions had yet been taken.
“The discussions between SSE and [npower owner] Innogy are continuing and are well-advanced but no final decisions have been taken and no binding agreements regarding the terms of any combination have been entered into,” SSE said in a statement to the Stock Exchange.
The company added that it was mindful of the impact on staff and customers, and would inform them of developments as soon as possible.
The big six suppliers have been haemorrhaging customers over the past few years in the face of cheaper, more digital savvy and greener energy companies. These new operators now have 20% market share, up from 1% a decade ago.
While SSE made a substantial profit margin of 6.9% in 2016, npower reported an operating loss of £90m last year as it lost nearly 80,000 customers and struggled to get a grip on costs. Industry figures had previously said the brand had become so tarnished that a rebrand was likely.
Experts said that SSE stood to benefit the most. “We see this as a positive move for SSE and Innogy, although the relative scale of the UK supply operations within both entities means SSE is significantly more exposed to any upside,” said analysts at RBC Capital Markets.
If the merger does go ahead, the newly-created supplier would have nearly 12.7 million customers, putting it within touching distance of the current biggest supplier, British Gas, which has 13.7 million.
Industry figures said that because the new entity would not be bigger than British Gas, it was unlikely to be blocked by the government’s competition watchdog.
They said that the move was probably driven by an attempt to cut costs through economies of scale but warned the two firms were likely to face problems integrating their IT systems.
This week SSE wrote to Greg Clark, the business secretary, informing him that from the next financial year it was going to stop rolling customers on to standard variable tariffs when their fixed deals come to an end. In the longer term, it said it was considering dumping standard variable tariffs entirely.
One comparison site said the move could potentially benefit npower customers. “This merger could in fact be good news for customers. SSE currently have lower prices than npower as well as better service levels,” said Mark Todd of Energyhelpline.
Octopus Energy, a challenger supplier, said the mooted merger cemented the case for price caps. Greg Jackson, the firm’s CEO, said: “This clearly strengthens the need for government action on pricing in energy. Both of these companies are ones with questionable customer records – npower has the highest standard variable tariff, and SSE have the highest proportion of customers on standard variable tariffs.”
A spokeswoman for energy regulator Ofgem said it would not rule on the potential merger: “Our role is to represent the interest of consumers. It is not part of our jurisdiction to decide on a merger. However, we would advise relevant authorities if we were concerned that a merger would not be in consumers’ interests.”
The announcement comes as industry data shows that more than 600,000 people switched energy supplier in October, up 10% on the month before. A third of those switching moved to smaller suppliers.
A poll by Opinium for challenger firm PurePlanet has found that half of customers with the big six are considering ditching them for another supplier. For households with British Gas, which hiked its prices in September, 29% are thinking of leaving in the next six months, the research found.
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Who are the big six?
Number of customers: 7.7 million Who owns it: UK-listed Chief executive: Alistair Phillips-Davies Where it is based: Perth, Scotland Profits last year (earnings before interest and tax): £1.54bn What they’re in: Energy supply, generation and networks
Number of customers: 5.2 million Who owns it: Iberdrola (Spain) Chief operating officer: Keith Anderson Where it is based: Glasgow Profits last year: £1.25bn What they’re in: Energy supply, generation and networks
Number of customers: 5 million Who owns it: Innogy (Germany) Chief executive: Paul Coffey Where it is based: Swindon Profits last year: £90m loss What they’re in: Energy supply and generation
Number of customers: 13.7 million Who owns it: Centrica Chief executive: Mark Hodges Where it is based: Staines-upon-Thames Profits last year: £574m (NB £1.46bn for parent company Centrica) What they’re in: Energy supply and generation
Number of customers: 5.2 million Who owns it: Électricité de France (France) Chief executive: Simone Rossi Where it is based: London Profits last year: £8m loss What they’re in: Energy supply and generation
Number of customers: 6 million Who owns it: E.ON (Germany) Chief operating officer: Michael Lewis Where it is based: Coventry Profits last year: £337m What they’re in: Energy supply and generation
Fast-growing, energy-hungry businesses can consume a lot of fuel; and if you don’t keep track, those gas and electricity costs can really stack up.
Savvy business owners will constantly shop around for a better deal – as there are always better deals to be had. Don’t pay more than you need to because of inaction, get comparing, find yourself a better deal, and change suppliers today.
Below, we’ll compare business energy suppliers, look at what’s covered by your gas and electricity providers, what you should be looking for with your business energy tariffs, what you need as a small business and what you should expect from a business energy quote.
Gas for businesses
Whether it’s for hot water and heating your premises, or fuelling kitchen equipment, gas is an essential fuel for the daily running of your business.
Unlike domestic customers, businesses are able to access gas at a lower per kWh price because they generally use more of it; however, they will usually pay a higher rate of VAT.
Electricity for businesses
Providing light and the power for any hardware and equipment you need to run your business on a daily basis, businesses tend to use a lot of electricity.
Like with gas, this means they can afford to negotiate a better deal on their electricity contract though may be hit by higher wholesale prices.
Business energy prices
Business energy prices can vary wildly from supplier to supplier and no two firms’ energy usage is going to be the same. Many factors – including your size, location, business type, sector, and even credit rating – influence how much you will be paying and which provider will be best suited to your needs.
Unlike domestic energy costs, business energy prices are driven by the market, meaning they can vary wildly even from day to day. Using an expert comparison service is the best way to ensure you get a good deal on your business energy.
You could pay by unit pricing, which is based on the size and consumption of your company, or a fixed business gas price plan, with which you pay a set price for a fixed period of between one and three years.
Generally, businesses will be subjected to a 20% rate of VAT on their energy bill, though this can be reduced if you meet the low energy consumption requirements. A business is regarded as having low energy consumption if its consumption of electricity is less then 33kWh per day or 1,000 kWh per month on average, and below 145kWh per day, or 4,397kWh per month for gas.
Electricity costs for business
The table below provides an idea of how much you’ll expect to pay for electricity, depending on the size of your business.
Average annual usage
Average electricity price (per kWh)
Standing charge (daily)
Average annual price
5,000 – 15,000 kWh
13p – 13.5p
26p – 30p
£650 – £1,800
15,000 – 30,000 kWh
11.8p – 13p
24p – 26p
£1,900 – £2,900
30,000 – 50,000 kWh
11.3p – 11.8p
21p – 23p
£3,300 – £5,000
Gas costs for business
The table below provides an idea of how much you’ll expect to pay for gas, depending on the size of your business.
Average annual usage
Average gas price (per kWh)
Standing charge (daily)
Average annual price
5,000 – 15,000 kWh
4,1p – 4.5p
23p – 26p
£300 – £700
15,000 – 30,000 kWh
3.8p – 4p
21p – 22p
£800 – £1,400
30,000 – 50,000 kWh
3.5p – 3.7p
18p – 20p
£1,500 – £2,000+
One thing to be aware of when you compare business energy suppliers is that the cheapest offer may not necessarily be your best option – there are other factors. Take a more holistic view of the potential benefits offered by a supplier before making your selection.
Business energy tariffs
A business energy tariff is the payment plan your provider will put you on depending on your consumption, needs, and size. Work with your supplier to tailor your plan accordingly.
Unlike their domestic cousins, business energy tariffs tend to be set at a higher price as business energy usage is harder to predict. In order to get the best deal, you should be armed with as much information as possible about your average energy usage before comparing quotes.
Business energy suppliers and consultants
While the ‘Big Six’ energy suppliers (British Gas, EDF Energy, E.ON UK, npower, Scottish Power, and SSE) have traditionally dominated the UK energy market, changing attitudes and energy watchdog Ofgem’s referral of the industry to the Competition and Markets Authority (CMA) have resulted in a significant shift towards independent energy suppliers over the last few years.
In 2013, independent Warwick-based supplier First Utility became the seventh-biggest supplier in the UK, but it has since stopped taking commercial contracts. Likewise, OVO Energy, another independent energy supplier, has also since ceased its business dealings and sold any business customers to multi-service provider Verastar in 2016.
BAS Energy is an energy consultancy the on a mission to help UK businesses achieve optimal energy efficiency. It advises clients on the most reliable suppliers with competitive prices and claims to have helped more over 200,000 businesses save more than £42m since 2006.
Its other services include gas and electricity procurement, invoice validation, data management, portfolio management, carbon management energy audits and compliance. BAS Energy was acquired by Smarter Business in July 2017.
Founded in 2005, Power Solutions is an independent energy consultant that has helped UK clients across 10,000 sites cut their costs and save. It also provides energy efficiency and utility solutions to help businesses become more energy efficient.
Its advice and consultation are free, with suppliers paying a fixed commission fee when a customer is placed.
With more than 15 years of experience in the energy sector, Smarta is able to offer its customers very competitive pricing structures thanks to the strong relationships it has formed with energy suppliers, both independent and established.
Smarta can also help with the installation of a new meter.
Make it Cheaper
This energy procurement company was founded in 2007 and helps its customers find the best prices for their utilities. In 2015 it embarked on a commercial partnership with the Federation of Small Businesses (FSB) to launch an energy switching service dedicated to its members.
In addition to its energy procurement services, it offers insurance, phone, broadband, and finance.
One of the UK’s leading energy suppliers, EDF claims to be the largest producer of low-carbon electricity and the biggest supplier of electricity by volume in the UK. It offers a range of competitive fixed contracts rates for business, as well as a flexible, short-term electricity contract for new businesses or those moving into new premises.
For customers that don’t want to commit to a fixed term contract, EDF’s Freedom for business tariff gives the option to move onto a different tariff at any time, with variable price, no fixed end date and no notice to leave.
The UK’s largest supplier of energy, British Gas for business claims to supply gas and electricity to more customers than any other business energy supplier (400,000 businesses).
The company offers both gas and electricity in one package or separately, and has a range of fixed term and variable price plans.
One of the newest kids on the block, Bulb is a 100% renewable electricity and 10% renewable gas supplier that claims to offer prices around 20% lower than the Big Six. All the electricity comes from independent renewable generators across the UK.
Founded in 2015, the company doesn’t currently serve sole traders but expects to be able to in the near future.
Founded in Nottingham in 2014, Yu Energy is an energy supplier focused on providing gas and electricity to small and medium-sized businesses. It offers fixed, market-based prices and gives each customer its own personal account manager in a bid to provide a more customer-centric experience than its larger rivals.
Yu Energy floated on the London Stock Exchange’s Alternative Investment Market in a significantly oversubscribed IPO in March 2016.
Small business energy
Many providers offer tariffs that are specifically targeted at small businesses. Generally, the bigger your business is the better value you are getting for your energy as you can buy it at closer to the wholesale price.
Fixed rate gas and electricity contracts usually represent the best deals on small business energy. However, though you may be insulated from sudden spikes in energy prices, you will also be unable to take advantage of sudden drops in prices and it can be very expensive to exit a contract.
Business energy quotes
Make sure you’re informed about the most important elements included in a business energy contract so you can understand whether the deal you’re getting is a good one. Here’s what you should be looking out for:
Unit rates – this is the set amount your business will pay per unit (kWh) of energy that it uses
Standing charge – this is a fixed daily cost that covers the expense of repairing and maintaining a businesses’ energy facilities
Agreed supply capacity – the maximum demand that a business needs from its supplier, ensuring that amount (and no more) is continuously available
Maximum demand (MD) – measured in kWh, this is the highest value of energy a business could use in a half-hour period, taken from the highest demand recorded during a calendar month or billing period and multiplied by two to give an hourly MD. Penalties can be incurred for exceeding this
Cooling off period – a period of time after signing a contract in which they can cancel without financial penalty (rarely offered to business customers)
The billing period – the period of time that a bill will cover, which can be negotiated for favorable terms with your supplier
The renewal window – this comes at the end of your contract and is a 60 or 120-day window, giving you time to find a better deal or stick with your current supplier
In order to get the best energy quote for your company, you should have the following information to hand:
Do your research – you need to understand energy contracts if you want to get the best deal
Read reviews – See how other consumers have rated potential suppliers. There are plenty of credible online sources where you can compare
Know your current numbers and consumption pattern – work out when your peak energy consumption times are and find out your Meter Point Reference Number (MPR) for gas and your Metering Point Administration Number (MPAN) for electricity
Shop around for quotes – don’t just go with the first attractive offer, keep shopping around for a better one and make sure you get the best deal for your business
Once you’ve agreed to a business energy contract, you’ll be locked in for the stated time, so make sure it’s definitely the right one for you before committing.
Compare business energy quotes
Reducing your business energy costs can significantly improve your bottom line so it’s essential you are always on the lookout for a better deal.
However, making sense of the varying prices and plans from different suppliers, as well as understanding the quotes can be tedious and time-consuming
The UK’s biggest energy companies made a profit of £1bn last year and have increased their profit margins in recent years despite losing millions of customers to challenger firms, according to Ofgem – the Office of Gas and Electricity Markets.
The energy regulator said the big six suppliers enjoyed a healthy margin of 4.5% on average in 2016 by charging higher prices to consumers who have not switched, with the gap between the best and worst tariffs widening to £300 a year.
“Supplier margins have been rising fairly significantly over the last seven years or so,” said Joe Perkins, Ofgem’s chief economist.
“Some of that increased margin is clearly down to increased cost efficiencies but the level of [consumer] engagement also plays a role.”
The regulator found that if energy suppliers made the same profit on poorer-value standard variable tariffs as they did on cheaper fixed-term deals, the big six would have posted a loss of 6% last year.
British Gas made the biggest profit margin last year, at 7.2%, followed by E.ON with 7%, SSE with 6.9% and Scottish Power with 5.2%. Npower and EDF both made a loss.
“Less-engaged consumers appear to allow suppliers to offer very competitive prices to engaged consumers and still make a profit after deducting their operating costs,” the report said.
A spokesperson for the Department for Business, Energy and Industrial Strategy (BEIS) said: “The regulator’s report shows there are still millions of people paying too much for their energy.
“While it is positive to see 1 million fewer people are on poor-value tariffs this year, it is not right that the majority of people remain on them.”
First Utility, one of the biggest challenger firms, said the report was further evidence of why ministers were capping prices.
“It [a cap] is the inevitable consequence of the big six’s lack of regard for their customers and they only have themselves to blame,” said Ed Kamm, the company’s chief commercial officer.
However, the £1bn profit is down from the peak of £1.2bn, with smaller suppliers driving the big six’s market share down to 80%.
“Profit in absolute terms has been falling for the six largest suppliers as they’ve been losing customers to smaller firms, so whilst they’re making a stable or increasing margin on revenues they earn, that revenue base has fallen somewhat as new entrants are coming in,” said Perkins.
Ofgem said it was pleased that households were using a fifth less energy than a decade ago, largely because of improvements in energy efficiency such as insulation and better boilers.
But the regulator is concerned that some people are rationing their use of gas for heating, such as by turning down the thermostat. It believes a third of the reduction in gas consumption over the last 10 years is a result of consumers limiting their heating in response to price hikes.
“Self-rationing is a particular risk for low-income consumers,” said Perkins.
While May’s wider cap is unlikely to take effect until 2019, Ofgem said that a narrower cap on 4m vulnerable households had reduced typical dual fuel bills by £60 a year since being imposed in April.
However, the regulator found the cheapest tariffs had been withdrawn and most suppliers had converged with pricing just under the cap. It would not be drawn on whether May’s cap would have the same effect.
Richard Neudegg, head of regulation at comparison site uSwitch.com, said: “Prices have converged around the level of the prepayment price cap and Ofgem acknowledges that some consumers have seen their bills rise due to the cheapest deals being withdrawn.
“One of the risks of applying a cap to the wider retail market is that the competitive forces which drive prices down will be squeezed out, leaving customers with nowhere to go to escape expensive tariffs or poor service.”
Ofgem’s state of the market report also said the cost of keeping the lights on in recent years could have been cheaper for consumers if National Grid had more accurately forecast the number of power stations required to be on standby during winter.
Another area where households had sometimes paid “a higher cost … than necessary” was for policies cutting carbon emissions from energy, the report said.
“This hasn’t come cheap,” said Perkins, of the subsidies paid by consumers to support windfarms and solar panels in recent years.
Behind the political battles over household bills lurks a far greater energy cost crisis. It risks damaging British industry and undermining attempts to boost productivity after Brexit.
Households are paying more for clean power than they should, but official data shows UK bills are still below average compared to the EU.
The picture is more worrying for industrial and commercial customers. In this league table UK businesses pay well above the average. The cost burden they bear is second only to Denmark.
The issue is under discussion at the Treasury. Officials are clear that for the UK to attract inward investment the country needs to be competitive on energy costs, even while taking action to reduce carbon emissions.
“This is why the Government has commissioned an independent review into the cost of energy led by Prof Dieter Helm … to deliver the Government’s carbon targets and ensure security of supply at minimum cost to both industry and domestic consumers,” the Department of Business, Energy and Industrial Strategy said earlier this year.
The Helm review concluded that bungled policymaking and Governmental tinkering has meant the UK is paying “significantly” more than it should.
Andrew Buckley, a director at the Major Energy Users Council (MEUC), agrees. “The report refers to decarbonisation and social policies making up 20pc of bills,” he says.
“For our members we calculate that these costs will reach over 40pc by 2020 and this is the main reason why our industrial power bills are the amongst the most expensive in Europe.”
The Government has already been forced to provide an 85pc rebate on green energy taxes for UK steel makers. The £5m a month refund is meant to help avoid another crisis for the embattled industry. Energy costs remain a threat to other high-energy industries, however. Water companies are some of the highest energy users in the country, alongside factories and the data centres run by some of the biggest tech and telecoms giants
“Some energy intensive businesses receive some relief from these charges but the great majority of commercial and industrial companies amongst MEUC membership do not,” Buckley says. It comes at a time of paramount importance for the economy as Britain prepares to leave the European Union. At the same time the cost of importing parts is rising and attracting skilled labour is becoming more difficult.
Today, an annual electricity bill for one of Britain’s top 10 highest energy users stands at around £120m a year, but within a few years this will rise to £170m
If Helm had his way, all the costs of subsidising Britain’s low carbon power projects – such as wind, solar and new nuclear plants – would be scrapped from industrial bills altogether.
Ilesh Patel, from Baringa Partners, spent the summer working with large industrial users hoping to manage the looming cost crisis.
In a worrying twist he found the most effective efficiency tactics in use today risk accelerating the energy cost crunch for those users with the highest electricity appetite.
“The more sophisticated energy-intensive companies are looking at things in three ways,” Patel explains.
The first is by reducing their reliance on the main power grid by generating their own electricity from small-scale power projects on their own sites. These could take the shape of solar panels or micro gas plants which create both heat and power. The mini-system could also include battery storage. “The immediate impact on a bill would be material and clear – just by buying less from the grid,” Patel says.
The second option is to pay less for what you buy. Patel says there is an increasing appetite among major companies to lock-in bilateral deals directly with renewable power generators which can supply long-term, fixed-rate electricity at below the market price.
“The price agreed today would be the same price in 15 years’ time, and there’s no variability on that. That’s what makes it so powerful for energy consumers or a manufacturing facility,” he adds.
Finally, Patel says companies are trying to use less energy in the first place. Efficiency measures may be a relatively low-tech route to tackling spiralling costs but every little bit helps in a crisis with no magic bullet.
The end energy vision for a high-energy manufacturer, water company or data centre could involve using less energy, generating their own power as much as possible, and where not possible contracting to buy someone else’s. The common denominator is using less from the national grid.
For those which are able to insulate themselves against the higher prices of grid-bought power, costs can be reduced. But for those left behind the move away from grid power could mean the problem escalates.
Patelel’s three-point plan is not an option for all energy users. For example, a typical one-megawatt solar project – very small compared to a 50-megawatt steel plant – would need land the size of a football pitch.
Trying to find 50 football pitches of land, and then install batteries, is just not practical for a very high energy user, he says. Those left behind will be the most energy-intensive industries and manufacturers which support thousands of jobs across the country, as well as low-income and socially vulnerable households which cannot afford to embrace the new technologies which might be able to help save them money.
“The big question is when will we reach a tipping point,” says Patel. “This is all relatively small-scale stuff when only a few hundred customers can move off the grid, but soon cost reductions in solar and battery storage will make it viable for the vast majority of industrial, commercial and domestic customers to follow.
“Britain will still need its national grid, and will still need the smaller regional networks. But as more customers only ever use the grid as a backup, how can we charge for the network use?”
The cost of maintaining the country’s pipes and wires is calculated by the energy regulator based on how much power or gas is used. If commercial customers only use the grid for backup it will fall to those less able to be self-sufficient to bear the brunt of the grid’s maintenance costs.
Proponents of off-grid generation rightly point out that the trend will help reduce the overall cost of maintaining the grid – but not low enough to protect heavy industry from spiralling costs.
“The very largest energy users will struggle to get their bill down without some kind of Government intervention in the cost base. The levers just can’t be pulled by them in the same way as can be done for the vast majority of industrial and commercial consumers,” Patel warns.
The concern is front and centre on policymakers’ agenda but Ofgem’s current review of network costs does not go far enough, according to some.
“The scope of the review that has been launched is woefully narrow in my view,” says one industry insider, who asked not to be named.
“They haven’t included the really long-term issues. How do we charge for legacy costs in a world where domestic and commercial solar is becoming more affordable for high net-worth but not affordable for really low-income or squeezed middle families? Their review doesn’t include this at all.”
Ofgem’s so-called “significant code review” will reveal its findings and proposals in the second quarter of next year and will deliver decisions around three months later. These will only take affect early next decade.
In the meantime, the pressure on industry is unlikely to ease.
Britain is importing an “increasing amount” of electricity from continental Europe which is putting its supply at risk.
A new report projects the UK will receive 67TWh of power from interconnectors by 2030 – a 10-fold increase in the projection made five years ago.
In the 12 months to March this year, the UK imported 17.22TWh but exported 2.78TWh.
The Centre for Policy Studies (CPS) argues the more reliant Britain becomes to power from Europe, the more vulnerable it will be to disruptions in supply, sudden price spikes or a wider tightening of capacity which pushes prices up.
It adds the imported electricity also has a “unfair competitive advantage” as it is not subject to the Carbon Price Floor or transmission charges faced by British generators.
It believes rather than cutting emissions, Britain is to some extent “offshoring” them – closing its coal-fired power plants but continuing to buy energy from Europe “which is likely to have come from plants of the same type”.
The think tank argues the UK’s energy policy must prioritise the building of new gas-fired power stations for ensure energy security and the Competition and Markets Authority should launch an inquiry into the role of interconnectors.
Tony Lodge, CPS Research Fellow and lead author of the report said: “At a time when spare electricity generating margins across Europe are falling, it does not make sense to build an infrastructure which risks making the UK over-dependent on imports.
“There are significant supply, cost and market distortion implications of doing this at a time when the government should be looking to strengthen energy security and reduce bills. It would make much more sense for the UK to build up a safe electricity supply surplus from generators in Britain on a fair and level playing field.”