Understanding Business Energy Tariffs: The Full Breakdown
Energy tariffs are complicated on purpose. This guide breaks them down so you can finally see where your money is really going — and how to stop waste before it drains your margins.
Whether you’re a business owner, facilities manager, or office administrator, you probably didn’t sign up to be an energy expert. Yet here you are, with responsibility for budgets, bills, and renewals that can add up to thousands. The energy tariff system isn’t designed to make your job easy. It’s full of jargon, hidden charges, and terms that can cost your business dearly if you get them wrong.
What exactly is a business energy tariff?
At its core, an energy tariff is just the pricing structure your supplier uses to charge you for gas and electricity. But beneath the surface, there are dozens of moving parts that affect your final bill. For businesses with annual spends of £500k-£5M, even a minor difference in unit rates or standing charges can mean hundreds of thousands in extra cost each year.
The two main components: unit rate and standing charge
Every business tariff is made up of two numbers:
- Unit rate: how much you pay per kilowatt hour (kWh) of electricity or gas you consume.
- Standing charge: a daily fixed cost you pay just for being connected, regardless of how much you use.
Sounds simple. But here’s the catch: suppliers often use these two levers to disguise true costs. For example, you might be offered a low unit rate but paired with a sky-high standing charge that makes the overall deal more expensive.
Fixed vs. variable tariffs
Business energy contracts usually come in two forms:
- Fixed tariffs: you lock in a set unit rate and standing charge for the contract period (often 1–3 years).
- Variable tariffs: rates move with the wholesale market. You can win when prices fall… but lose badly when they rise.
For board reporting, fixed tariffs are attractive because they make budgeting easier. But beware: “fixed” doesn’t always mean what you think. Hidden clauses may allow suppliers to change rates under certain conditions, leaving you exposed.
Contract length and renewal risk
Most businesses sign 12-36 month contracts. The danger comes at renewal. If you miss the window to renegotiate, you risk being rolled onto a “default” or “out-of-contract” rate – often 30–70% higher than market prices. For a £2M annual energy spend, that’s an instant hit of £600,000 in avoidable costs.
Other charges buried in tariffs
Suppliers don’t just charge for energy. Your tariff also includes pass-through costs such as:
- Distribution Use of System (DUoS): charges for using local electricity networks.
- Transmission Use of System (TNUoS): costs of moving power across the national grid.
- Capacity charges: penalties if you exceed your agreed consumption levels.
- Environmental levies: government-mandated charges that suppliers pass on.
These charges aren’t negotiable, but how they’re bundled (and explained) varies. A supplier that hides these costs in opaque bills makes it impossible to analyse fairly unless you know how to unpack the numbers.
Why tariffs feel deliberately confusing
Suppliers benefit when customers don’t fully understand their tariffs. Confusion breeds inaction, and inaction is profitable because default rates, rollover clauses, and hidden charges quietly boost margins at your expense.
How to analyse effectively
To take control, you need to compare your current tariff against live alternatives. That means gathering:
- Your current unit rate and standing charge
- Your annual consumption (in kWh)
- Contract start and end dates
- Any pass-through or additional charges
Once you have these, you can calculate your “true cost per kWh” and compare it to market benchmarks. This is exactly what our analysis service does.
Common myths to avoid
- “Fixed tariffs can’t change”: false. Some suppliers build in clauses to adjust rates under certain market conditions.
- “Lowest unit rate = best deal”: not if the standing charge is inflated.
- “Renewals don’t matter”: missing a renewal window is one of the biggest cost leaks in business energy.
Next steps: take control of your tariff
Now that you understand how business energy tariffs really work, the next step is protecting your organisation from hidden traps. Read our guide on The Hidden Traps in Business Energy Contracts to see what suppliers hope you’ll overlook.
Or explore Cost Leakage to learn how silent overspend can drain margins without anyone noticing.