Energy Contracts with No Standing Charges for Business
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What is a standing charge?
A standing charge is a fixed charge that goes towards covering the fixed, non-volume related costs of providing gas and electricity. They will appear alongside the unit rate on energy bills and in published tariffs. Unlike the unit rate, the standing charge is payable regardless of whether any energy is actually consumed.
Most electricity and gas tariffs in the UK for both domestic and business customers include a standing charge as part of the normal amount you pay. It is important to understand the relationship between the standing charge and unit rate when comparing energy supply offers. A tariff with a low unit rate may appear attractive, but the overall costs may still be higher than another tariff if the standing charge is significantly higher.
CMA recommended a ban on complex tariff structures
As part of its energy investigation, the Competition and Markets Authority (CMA) has directed the energy regulator, Ofgem, to overhaul its requirements on tariff structure. Ofgem had previously stated that all tariffs must have a single standing charge and either a single unit rate or time-of-use rates. Ofgem had permitted time-of-use tariffs, but stated no more than one unit rate can apply to any given time period and unit rates cannot vary by the level of consumption.
Since the CMA’s direction, the regulator has introduced changes to standard supplier licence conditions in order to implement the CMA’s recommendations. These came into effect in November 2016. This does not mean that all tariffs will need to remove the standard charge element. It rather allows for new tariffs structures to be introduced. For example, a tariff that may not have a standing charge at weekends. This will allow for the standing charge to be zero for specific days or even completely removed from the energy tariff. In such a case, consumers could face a situation where they do not have to pay any energy costs on days they do not use gas or power. This might be beneficial for seasonal businesses or those which do not need to use energy every day. However, the flip side of this is that your gas and electricity unit rate prices may be more expensive. This would be the case as the costs to suppliers will remain the same and so tariffs will have to be re-balanced to ensure that standing charge costs are still covered.
Standing Charges varies for businesses
Suppliers could price the standing charge element in fixed energy contracts either as pence per day or £/month cost. All electricity contracts offered by suppliers have some sort of a standing charge. There are currently no ‘zero standing charge’ electricity tariffs available from suppliers. However, some gas contract offers can have a unit rate and no standing charge. Zero-rate standing charge gas tariffs tend to have higher unit charges than other offers. Also, standing charges tend to be the same regardless of the length of the contract.
Example from Procurement
For a 24 month duration the gas contact offer could be as follows:
- With standing charge: Unit rate 2.1022, group standing charge £36.43 per day. Total annual costs: £60,638.22
- Without standing charge: Unit rate 2.7189. Total annual costs: £61,222.52
- For a 36 month duration the gas contract offer might be:
- With standing charge: Unit rate 2.1118, group standing charge £36.43 per day. Total annual costs: £60,854.41
- Without standing charge: Unit rate: 2.7281. Total annual costs: £61,436.46
However, the actual charges for both gas and electricity differ by supplier. Some suppliers can have a higher unit rate and lower standing charge, while others vice versa. For electricity, the standing charges for a large business customer could range between £0.86 and £2.52 per day depending on the supplier.
Large energy users on flexible contracts tend to have their standing charges for gas and electricity as a pass-through cost. They are consistent for all suppliers and always appear on the DUoS or gas transportation charges. The charges would change during the course of the contract in line with alterations to DUoS and gas transportation charges. Suppliers might also change their management fee on a per meter basis rather than as a £/MWh cost.