Sustainability

The Changing Landscape of Energy Charges for UK Business Consumers

As the business energy landscape evolves, so do business energy charges and the way costs are allocated to companies. Traditionally, these charges were highly indexed to how much energy a business consumed. However, there’s been a growing trend towards higher fixed charges, reflecting a shift towards paying for capacity rather than actual usage.

This EnergyIntel explores this transition, drawing parallels with other sectors and examining arguments for and against such a shift.

The Traditional Usage-Based Energy Pricing Model

Historically, the relationship between consumption and cost for businesses was simple: the more energy consumed, the higher the bill. Whilst an element of ‘time of use’ charges made things slightly less than straightforward, this model is intuitive and easy to understand, directly correlating costs with usage. 

As the energy market continues to evolve, there are signs of a shift towards a different model, where fixed costs play a more significant role. 

The chart below shows the non-wholesale costs for electricity shown as a cost per kWh for a fairly typical business in the UK. This particular site in the northwest of England uses around 3 GWh of electricity per year and is High Voltage (HV) band 2. All of the elements have been converted into a p/kwh value in order to show the trend.  

The chart shows overall non-wholesale costs per unit of energy consumed. Immediately you can see the total non-wholesale costs have risen by 32% since 2018, but what’s more is that these non-wholesale costs are forecast to increase further between 2024 and 2028, a rise of around 40%. 

The interesting shift, however, is that while the unit rate-based charging elements have been steadily increasing, the fixed charges in 2024 are 1892% up from 2018 and are forecast to double again between 2024 and 2028. By 2028 we estimate that around 45% of non-wholesale costs will be charged based on a fixed charge methodology rather than being indexed to consumption.

The Rise of Fixed Energy Charges for Businesses in the UK

What’s Driving the Shift to Higher Fixed Energy Charges?

The shift towards fixed charges rather than unit rate or time-of-use-based methodologies has been largely driven by the Targeted Charging Review (TCR). The national and district-level network operators feel the benefits of the TCR:

  • 1

    Infrastructure Costs: Maintaining and upgrading energy infrastructure requires significant investment. By increasing fixed charges, District Network Operators (DNOs) can secure a stable revenue stream to fund these investments, ensuring a reliable energy supply.

  • 2

    Grid Stability: As businesses adopt energy efficiency measures and renewable energy sources, overall consumption may decrease. However, the infrastructure still needs to be maintained. Higher fixed charges ensure that grid maintenance costs are covered, regardless of consumption levels.

  • 3

    Predictable Revenue: For national and district network operators, predictable revenue is crucial for long-term planning and investment. Fixed charges provide a stable income, reducing the financial risks associated with fluctuating consumption patterns.

Examples From Other Sectors

This shift from consumption-based charging to capacity or availability-based charging is not unique to the energy sector. Many other industries have seen transitions towards models where fixed charges play a significant role:

  • Telecommunications: 

    • Mobile Phone Contracts: The transition from pay-per-use plans to fixed monthly contracts offering unlimited texts, calls, and data; 
    • Internet Service Providers: Moving from usage-based billing to flat-rate monthly fees for broadband services.

  • Software and SaaS: 

    • Companies like Adobe and Microsoft now offer their software via subscription models (Adobe Creative Cloud, Microsoft 365), providing access to a suite of tools for a fixed monthly or annual fee.

  • Music and Video Streaming:

    • Spotify and Apple Music: Offer unlimited access to music libraries for a flat monthly fee; 
    • Netflix and Amazon Prime: Provide access to extensive content libraries via subscription, replacing the per-video/DVD rental model of Blockbuster.

  • Fitness and Wellness:

    • Subscription-Based Fitness Programs like Peloton and ClassPass offer unlimited access to workout classes for a regular fee

The Other Side of the Argument: Where and Why Consumption-Based Models Persist

Despite the trend towards fixed charges, many sectors still rely on consumption-based pricing. Here are a few examples where the consumption-based charging model persists:

  • Uber and Taxis: Charge based on distance travelled and time taken, with dynamic pricing to reflect demand and supply conditions.

  • Air Travel: Airlines charge based on distance, time of booking, and class of service. There are no subscription models for unlimited flights, reflecting a strong correlation between cost and usage.

  • Public Transport: Many systems still operate on a pay-per-ride basis, charging passengers per journey or distance travelled.

Why Consumption-Based Models Make Sense for Consumers

  • 1

    Variable versus fixed costs: Many businesses have significant variable costs that scale with output. Having too many fixed overheads can become a challenge.

  • 2

    Customer Preferences: Some customers prefer paying only for what they use, avoiding the feeling of overpaying for services or products they do not consume.

  • 3

    The impact of reducing consumption is maximised, use less and pay less.

Implications for the Energy Sector

The energy sector’s shift towards higher fixed charges and lower usage-based charges reflects broader trends in how services are priced. However, this transition is not without its challenges:

  • Impact on Low-Usage Businesses: Businesses that consume less energy may face higher costs, as a larger portion of their bill is fixed. This particular challenge occurs at the top and bottom of the ‘bands’ used for DuoS and TNuoS fixed charges.

  • Incentives for Efficiency: Usage-based charges incentivise businesses to adopt energy-efficient practices. Higher fixed charges might reduce this incentive in the future.

  • Adapting to Change: Businesses need to adapt to this new pricing model, possibly re-evaluating their energy consumption patterns and efficiency measures.

The shift towards higher fixed charges in the energy sector is part of a broader trend towards more predictable and stable revenue models. While this transition offers benefits like infrastructure funding and revenue stability for the network operators, it also presents challenges, particularly for businesses in the lower quartiles of their charging band. By examining parallels in other sectors and understanding the reasons behind both models, businesses can better navigate this evolving landscape and make informed decisions about their energy consumption and costs.

At Businesswise, our experts understand the newly introduced fixed charge methodology and have been successful at helping businesses navigate the change and take advantage of opportunities to reduce the overall bill.

Concerned about rising business energy costs?

The shift towards higher fixed charges is reshaping energy costs for businesses. Understanding these changes and optimising your energy strategy can make a significant impact on your bottom line. Our experts at Businesswise can help you navigate these shifts, identify cost-saving opportunities, and ensure you’re on the most efficient tariff for your business.

Get in touch today, complete our quick contact form, and one of our specialists will reach out to discuss how we can support your energy strategy.

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  • Author: Paul Scarborough, Chief Marketing Officer

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