What is the Difference Between Domestic and Commercial Electricity?

Domestic and commercial electricity is sourced and generated in the same way; despite this, the energy is sold very differently. This is because commercial energy has more regulatory and other considerations, also longer-term contracts, while domestic energy is generally simpler and easier to switch.

Understanding the difference between domestic and commercial supplies is useful if you run a business from home or you have commercial premises, and you want to reduce your bottom line. The article below outlines the main differences between domestic and business supplies

Energy Crunch & Price Caps

As we explored in our recent blog, the energy market is in the midst of an unprecedented crisis, only today, Bulb Energy, which has 1.7 million customers, has announced it will be put into administration. It is ironic that the challenge of managing the different needs of business and domestic consumers have, it could be argued, been a catalyst for the whole industry hitting a crisis. The regulator Ofgem, is currently wrestling with the implementation of the first ‘special administration’ undertaking for a supplier that is too big to simply be absorbed by the more tried and trusted supplier of last resort (SoLR) process usually and more regularly used to ensure customers move to a new supplier if their current one fails.

The price cap was a nice concept, introduced after years of suppliers charging extortionate rates to domestic customers who didn’t constantly switch. Not only was it introduced too late, but it failed to allow for flexibility, being set on a six-monthly basis and a new cap kicking in during the unprecedented price increases caused by geo-political and other market factors impacting the UK energy market exposed by a lack of storage. Ofgem is currently exploring changing the way the cap is set, with more frequent changes looking likely. Higher prices also look very likely, for domestic and commercial customers, thankfully for the many domestic customers facing fuel poverty and other financial pressures, they have been protected from the worst impacts, the same cannot be said for many businesses.

Price Differences 

The gas and electricity used for your home is the same energy used by businesses; it all comes from the same source. However, when it comes to pricing, the cost of business energy has, in the past, tended to be cheaper. However it is not that straightforward, particularly with the current market, with many businesses being exposed to higher energy prices whilst domestic customers are protected by the price cap.

Businesses consume much more gas and electricity than domestic users; for this reason, energy companies may provide services to businesses at lower premiums. Non-commodity costs are either rolled up into a single rate for domestic bills, or separated into more detailed bills for business – normally renewable subsidies, use of system costs, & taxes and other support levies. Businesses pay more taxes to fund the UK network system upgrades and incentivise renewable energy.

Value Added Tax 

Although businesses may receive cheaper rates, there tend to be more regulations on businesses and higher charges such as value-added tax. Value-added tax is a percentage tax that is charged on all goods and services – these rates are based on the product’s value. 

Businesses pay more VAT on their energy than domestic customers. In general, businesses pay around 20% VAT while customers pay 5%. One of the main reasons businesses are charged more VAT is to promote better energy efficiency for large-scale usage.    

Energy Regulations 

On balance, domestic energy customers have far fewer regulatory considerations than business customers. For one thing, more industry licensing is required to ensure industries adhere to energy policy and that businesses in industries are treated fairly across the board. 

That doesn’t mean there are no regulations for domestic customers. The regulatory body Ofgem exists to ensure that domestic customers receive the best service and the greenest service available. Ofgem holds energy companies accountable for domestic supplies, meaning that business customers are in many cases more exposed to supplier errors and other malpractice. 

Contract Terms 

When it comes to contracts, you will discover that businesses have longer contracts than domestic customers. Why is this? Businesses tend to use more gas and electricity and are less flexible than domestic users when it comes to changing their energy provider. 

Business energy customers typically choose a longer-term contract because it allows them to plan better and protect their bottom line, also allowing prices to be ‘locked in’ when prices are lower, with many businesses having made huge savings by fixing for 2,3,4 or even 5 years.. On the other hand, domestic customers can change suppliers more easily, so the industry is more competitive, domestic users typically have 12 month agreements, which can be broken by payment of a modest admin fee..     

Pricing Quotes 

Business quotes are vastly more complex than domestic quotes for energy procurement. This is because businesses have more complex and variable demands. Suppliers have to buy energy in advance to fulfil their business customers’ longer term contracts, they take into account risk factors, credit and industry type, also looking at specific usage patterns, for example the time of highest demand, also equates to the highest price. 

Quotes for business and domestic energy can be found online on comparing the market websites. That said, these quotes are often rough ideas and whilst it works well for domestic, for business the offers may change dramatically, and not always in a good way, once the process gets past the easy front end of the comparison site. Domestic quotes are more straightforward to navigate and process. Whilst some business quotes get declined and a higher premium is offered instead, others can be improved when you talk directly to an energy provider. Not many business owners have time to talk with all of the different suppliers, with a majority using an energy broker. If you need business electricity quotes, contact Jonstar today.