The energy landscape in the UK has undergone significant changes over the past quarter-century, but especially so over the course of the last few years. Commercial consumers have faced volatility in energy prices driven by market dynamics, regulatory shifts, technological advancements, and perhaps most critically, unpredictable geopolitical situations. Fixing energy tariffs for the long term can mitigate the damage from price shocks, ultimately saving you money over the lifetime of your lease.
A brief history on electricity tariffs
Non-domestic electricity tariffs in the UK have historically ranged from approximately 10p/kWh to 15p/kWh. From 2014 through 2021, energy prices increased on average by 4.91% annually, showing modest stability. Since 2021, however, that increase has averaged an incredibly volatile 21.95% annually. Non-domestic prices are still increasing on a quarterly basis and sit at an average price of 27.33p/kWh. Unfortunately, prices historically only go in one direction.
Source: Department for Energy Security and Net Zero
UK energy buyers know the shape of the above chart all too well. You’d likely be quick to blame the invasion of Ukraine on the 24th of February in 2022, and the subsequent closure of Nord Stream 1 to Northern Europe, but energy prices were already incredibly volatile as early as Summer 2021 coming out of the Covid-19 lockdowns.
Since then, wholesale prices have begun to relatively stabilise, but unlike domestic purchasers, businesses in the UK unfortunately do not benefit from price caps. There is no legislation as such, and not likely to come anytime soon, if ever.
Fixed vs variable pricing
Commercial energy buyers often opt for fixed-price energy contracts to mitigate the risks associated with market volatility. Fixed pricing provides long-term stability and predictability, allowing businesses to budget effectively and protect against sudden cost increases.
Conversely, variable pricing offers the potential for cost savings when market conditions are favourable. While variable pricing can result in lower energy costs during periods of market downturns, it also means exposure to the risk of sudden price spikes.
Even in a situation where a tariff is pegged to inflation, commercial consumers are likely to face such spikes over the long-term. After all, like inflation, energy prices over time tend to only go in one direction.
The energy market, 10 years ahead
Projecting ahead, if we were to take the current average 27.33/kWh price and peg it to the last ten years of inflation, or even the ten years prior to that, we can project the growth of the energy market.
Source: Historical inflation rates, OECD
If the above scenarios reflected a 10-year energy tariff, by the final year the energy buyer would be paying nearly 9p more than if they had fixed the price for ten years at 27.33p/kWh. In our own analysis, on tariffs we have offered our customers, the long-term exposure of variable tariffs can exceed the exposure of fixed tariffs by as high as 29%.
The answer is fixed
Navigating the complex landscape of the UK energy market, the choice between fixed and variable pricing remains a critical decision impacting financial performance and risk exposure. While fixed pricing offers stability and predictability, variable pricing presents opportunities for cost savings under favourable market conditions.
And yet, in a year when over a quarter of the world’s population will go to the polls, volatility and uncertainty may further forestall any favourable conditions. Commercial leases can outlast both governments and crises, and to mitigate the disruption of each, fixing becomes a reliable strategy.
InRange is creating a new energy asset class from the built environment, unlocking new revenue streams for landlords and saving energy costs for tenants. The InRange platform provides guaranteed 10-year fixed on-site and export tariffs, with AI-powered matching of surplus energy to data center and other in-network building demand through the InRange Marketplace.