What is a kWh and how is it calculated?
A kWh, or kilowatt-hour, is a unit of measurement used by utility companies to monitor how much gas and electricity a premises has consumed. Always quoted on your utility bills, these figures will allow you to see exactly how much electricity and gas your business has used and therefore what you are paying for.
Electricity prices explained
Electricity suppliers charge a certain amount per kWh of electricity your business uses, meaning the more kWhs you consume, naturally, the higher your electricity bill will be. To calculate the kWh of any given electrical device, all you have to do is multiply the appliance’s wattage by the number of hours it is in use over the course of a day, and then divide this number by 1,000. This total can then be multiplied by the number of days the appliance is in use for to give you an accurate idea of how much electricity it uses.
For example, if a large factory fan is in operation for an average of five hours a day at 250 watts, the watt-hours of this fan equal (250 watts x 5 =) 1,250 watt-hours per day. Next, divide this figure by 1,000 to provide the kWh per day. In this case 1.25 kWh per day. Assuming this fan is in operation every day, it would use 1.25 kWh multiplied by 365 (days in the year) to give us 456.25 kWh per year. Finally, times this figure by the electricity rate your energy supplier has set. If, for example, electricity costs 15p per kWh, then the fan costs you (0.15 x 456.25 kWh =) £68.44 (to the nearest penny) in electricity to run each year.
During energy audits, total kWh usage is the figure that specialist energy consultants will look to compare with the average consumption of other similar-sized businesses to analyse whether or not your business is wasting energy and to help find areas where electricity can be saved.
What is the average price per kWh for electricity?
In the UK there is no one standard price for electricity per kWh. This means your electricity bills may vary in cost from businesses that use a similar amount of electricity. The UK’s energy industry is an open market, meaning different energy suppliers compete for your business by setting their own rates. Although finding out you are paying a higher price for the same amount of electricity usage can be frustrating, businesses in the UK can use this open market to their advantage by regularly shopping around to find the cheapest business electricity deals.
According to data from the UK Government, the average cost of standard electricity for businesses in the UK was 11.66 p/kWh, as of Q3 of 2019. However, this average varies depending on the size of your business. The same research shows that ‘very small’ businesses, for example, are likely to experience higher energy prices, with an average of around 16.09 p/kWh, while ‘very large’ and ‘extra large’ business can expect the average price per kWh for electricity to sit at around 10.01 p/kWh and 9.68 p/kWh respectively. On the back of this, the average electricity bill for UK businesses is currently around £3,061 per year.
As well as the size of your business, the average cost can also vary depending on where in the UK your business is located. For example, according to research from data-driven personal finance site NimbleFins, both businesses and residents in Northern Ireland typically pay the highest rates for electricity, at around 9 per cent above the UK average – closely followed by those situated in Scotland and the South West. Perhaps surprisingly, businesses and households in London currently enjoy the cheapest average electricity rates, paying on average 5.7 per cent less than the national average.
Aside from location, electricity rates can also vary based on what time of the day you consume energy and even how your business chooses to pay for its electricity, be that through direct debit, prepaid meters or credit agreements. Paying with a regular direct debit usually brings about a lower average price per kWh for electricity in the UK, while those businesses that opt to pay using credit – through cheque, cash or credit card, for example – typically face the highest average prices per kWh for electricity.
What is a good rate for business electricity?
A ‘good rate’ for business electricity depends on a number of factors, including the size of your business, the length of contract you agree to, where you are located, how you plan to pay for your electricity, and how much time and effort you are willing to put into your business’ energy procurement strategy.
As a rule of thumb, a good electricity rate for your business is one that is lower than the national average when it comes to the size of your businesses and your location. This is to say, thanks to its buying power and preferable location, a large corporation based in London with average electricity consumption levels is naturally going to expect and demand a better rate for its business electricity than a small business based in Northern Ireland.
While there is no one-size-fits-all ‘good rate’ for business electricity, implementing a sound energy procurement strategy can help to ensure your business finds the best deal possible. Data from the energy regulator Ofgem suggests that more than one-third of UK businesses pay too much for their electricity, with a staggering one in five organisations admitting to not knowing that switching suppliers was even an option.
Although the process of finding a good rate for business electricity can be complex and time-consuming if you do this yourself, the cost-saving benefits are too great to pass up.
In order to find a good rate for your business electricity, always keep the following three best practice tips in mind:
- Avoid rollovers – When you receive a renewal notice from your current electricity supplier, make sure you do not blindly accept the automatic extension offer. These ‘rollover contracts’ can see your energy prices rise by anything between 70 and 100 per cent, as well as fixing you in a new deal for a prolonged period of time. And remember, if you do choose not to accept your new terms, terminating your contract before it automatically renews is important. If you don’t, you will be unable to change to a new contract.
- Shop around – When you are coming towards the end of your current electricity contract, shopping around for a new deal could save you a lot of money. Using a specialist price comparison site like Utility Bidder can help you find an improved electricity rate for your business with a new supplier, and we will manage the whole transition process on your behalf.
- Avoid out-of-contract rates – If you do decide to terminate your current contract at the end of its agreed term, ensure you find a new supplier and formally sign a contract with them as soon as possible. Otherwise, you could risk activating so-called ‘out-of-contract rates’. These charges can see your rates double until you sign with a new supplier.
Is business electricity cheaper than residential?
Although the final product is exactly the same, the pricing structures that shape business electricity deals and residential electricity deals differ greatly. This means that, usually speaking, business electricity does tend to be cheaper than residential electricity as businesses typically require far more energy than homes in order to operate. This increased demand for electricity allows businesses to essentially ‘buy in bulk’, meaning suppliers can offer better prices per unit in order to win potentially lucrative business electricity contracts. After all, suppliers will usually more than make up for selling business electricity at a reduced price, as the sheer volume of electricity provided when compared to residential customers will typically see any discount recuperated.
However, although business electricity is cheaper than residential electricity most of the time, there are instances where this is not always the case. Depending on the state of the energy market at any given time, domestic rates can occasionally work out less expensive than business rates. This is because providers of domestic electricity tend to purchase their supply months in advance before distributing it to their customers. This way they can wait until energy prices are low before buying it in bulk. When it comes to business rates, on the other hand, electricity is usually purchased at the same time the contract is set up. This means the business agrees to pay a rate that can be dictated by a strong or weak energy market. Generally speaking, this price is usually cheaper than residential electricity costs, however, if the prices are similar, taxes can play a key role. Domestic energy bills are taxed at five per cent VAT, whereas businesses are taxed at a much greater 20 per cent. Therefore, in theory, it’s plausible that a business could be required to pay more per unit of electricity in the long run. This situation is very rare, however.
How much should I be paying for electricity per kWh?
As this post has explored, the amount you should be paying for your electricity per kWh will depend on a number of variables. These include the size of your business, the length of contract you are willing to agree to, how much electricity your business requires to function, where you are located and how you plan to pay for your electricity.
In the end, the quality of deal you can find, and therefore how much you pay for your electricity, will come down to how savvy your business is when it comes to your energy procurement strategy. Whether you practice energy procurement in-house or work with a third party specialist, obtaining the most economically practical energy deals for your organisation will involve analysis of competitors, internal energy audits and in-depth price comparison analysis of a wide range of electricity suppliers.