What is a Variable Rate Business Tariff?
A variable energy plan is known as a standard plan or standard variable Tariff (SVT). On this plan, the unit rate can vary from month to month. When you have a variable energy plan, the price is influenced by the demand for energy at that time. If there is a high energy demand, the unit rate is high and vice versa. The prices in a variable energy plan usually change within each billing cycle. The price is not set until the end of each billing period. This type of Tariff is one of the most popular tariff plans offered by all major energy providers.
The market decides the unit rate for this plan. The energy company will show you which price their company expects to pay for each kWh, but this price may not be what you pay. Your energy provider indicates what they expect to pay to keep you informed. However, the provider does not have any legal obligation to honour what they are charging. For example, during a cold weather period, electricity prices will typically rise due to increased demand.
How are you charged for a variable rate business tariff?
Most of the time, for variable-rate plans, unit prices are based on an index. The index is determined by the price of natural gas and electricity in the wholesale market where the energy providers buy their energy from. The unit rate will reflect these price changes. This means that if there is no significant change in market prices at the time of your next billing, your unit rate will not change.
Some electricity providers also offer an index-linked plan with the inclusion of other energy sources or other products that are linked to market prices, such as electricity produced from wind power. However, some energy providers use their rates instead of an index to determine their business tariff rate.
On a variable tariff plan, there is usually no fixed contract that you have to sign. This means that if your tariff plan no longer works for you, you can easily switch to another tariff plan. This is not the case with a fixed-rate plan where you will have to get out of your contract if you want to go for a different electricity rate. With a variable business tariff, the price will change during a billing period.
These changes may be due to changes in wholesale prices or any change in your consumption levels. Under a fixed-rate plan, which you find in almost all billing cycles, the price will not change until the end of that billing period. The fixed price does not change when there is no demand for energy in the wholesale market and low prices.
What are the advantages of a variable rate business tariff?
Another advantage of having this type of Tariff is that they are cheaper when compared to fixed-rate tariffs, which do not adjust when the price goes down in wholesale market prices. This can be beneficial for businesses expecting similar or lower future energy prices, given that rates will fall along with market prices. Businesses expecting increasing energy prices will typically choose a fixed-rate plan to protect their balance sheets from this exposure.
The drawbacks of a variable rate business tariff are that the price is likely to change during the billing period. If you are not prepared for these changes, you may end up with an electricity bill not adequately budgeted for. Often, energy prices will rise in times of economic uncertainty, so a variable rate tariff can end up costing more than expected at a time when a business wishes to cut costs. This is the main reason that a fixed rate tariff is often seen as being worth the premium.
Another disadvantage is that some energy providers who offer a fixed-rate business tariff will often begin charging more than their previous rates once there is no demand for energy in the wholesale market. Some energy providers may also not be transparent about the prices in their business tariff plans.
What are the different types of variable rate tariffs?
Variable Rate Tariffs are available on all major energy providers. The two main types of variable Tariff are Fixed Price Variable Tariff (FPVT) and pegged variable Tariff (PVT). The first type of variable Tariff is called a fixed price variable tariff because energy providers set the price of electricity at the beginning of the billing period.
The price will not change until the end of the following month. Fixed-rate business tariffs are usually more expensive than a regular fixed rate tariff and may need to be reviewed and managed monthly. On average, most consumers save between 3% and 5% on their electricity bills through a fixed rate business tariff. The second type of variable Tariff is called a pegged variable tariff because the energy provider sets the unit rate, but it cannot change beyond that.
Energy providers can change their rates by increasing or lowering the unit price. Using this type of business tariff, energy providers will enter into a contract with an agency or market operator to set the unit rate. Energy providers can also decide whether to use an index or a market rate to determine their Tariff. PEG is the abbreviation for this type of variable tariff plan. Energy provider PEG tariff plans are arranged for trade confidence to be maintained. This means that energy companies are often required to feed energy into the grid at a specific price, usually below what they charge customers, for them to be able to sell it on wholesale markets.
Even with the disadvantages, firms often choose variable-rate business tariffs because of the lack of legal commitment to a fixed-rate plan. They are easy to switch from when compared to fixed-rate plans, which often carry financial penalties if you wish to leave the plan early. Also, because there are constantly changing prices, businesses can choose how they want to react to sudden changes in prices. Suppose a particular energy provider chooses business tariffs.
In that case, it is essential for individual businesses to constantly monitor the price movements to choose whether or not they wish to stay with that energy provider’s tariff plan. Learn more about fixed vs variable tariffs here.
Other useful links about Business Energy
EDF Business Energy
Deemed Rate Energy Contracts
What is an Energy Performance Certificate
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