How business energy prices are set, from wholesale market to your bill
Your business energy price is built in layers: wholesale energy, network and policy costs, supplier risk and margin, then tax.
A quote for business energy can look like a mysterious number. It is actually assembled from several layers, and only some of them are linked to the day-to-day gas and power markets. Knowing the layers helps you understand why quotes change, why they differ between suppliers, and why your price does not move in step with the news.
Layer 1: buying the energy (wholesale)
Suppliers buy gas and electricity from producers and traders on the wholesale market. Ofgem explains that prices there can move quickly, and that demand matters: prices tend to be lower when demand is low and supply is high, and higher in the opposite case. Gas demand peaks in winter because of heating, so winter gas is usually dearer.
Great Britain imports a large share of its gas. Ofgem's explanation says around 47% arrives by pipeline from Norway and 29% comes from the North Sea, with the remainder via interconnectors and liquefied natural gas (LNG). That is why events overseas, such as supply disruption or storage levels in Europe, move UK prices.
Spot, forward and hedging
- Spot (day-ahead) prices cover delivery tomorrow. They jump around with weather and demand.
- Forward prices cover delivery months or years ahead. A fixed business contract is largely based on forward prices at the time of your quote.
- Hedging means a supplier buying energy in advance so it can offer you a steady price. Ofgem notes hedging delays how quickly wholesale moves reach customers.
Layer 2: why electricity follows gas
The wholesale electricity price is set by the most expensive generator needed at that moment, and gas power stations often fill that role. Ofgem says gas currently sets the wholesale electricity price a large majority of the time, though NESO modelling estimates this could fall to around 30% by 2030 as renewables expand. This is why a gas price spike lifts power as well. Read more in why electricity price follows gas.
Layer 3: network and policy costs
On top of wholesale come charges for the grid and for government policies: transmission and distribution charges, balancing costs, renewables support, the capacity market and more. For business electricity these non-energy costs can make up a large share of the unit price, and some industry guides estimate it as more than half; the exact share depends on your site, meter and region. They are set largely by regulators and operators, not the market. See non-commodity charges explained, and TNUoS and DUoS.
Layer 4: supplier costs, risk and margin
Your supplier adds its operating costs, the cost of the risk it takes by promising a fixed price, and a profit margin. Risk matters: if you ask for a quote for a three-year fix, the supplier must cover the chance that your usage differs from forecast and that costs change. Credit risk also plays a part, which is why a poor credit history can lead to a security deposit or higher rates; see credit score and business energy prices.
Broker commission
If you buy via a broker, their commission is usually built into your unit rate or standing charge. Since 1 October 2022 for microbusinesses, and 1 October 2024 for all non-domestic customers, the broker costs must be shown in the contract's Principal Terms. See how much commission energy brokers take.
Contract length and timing
A longer fixed term is not automatically cheaper or dearer. When forward prices for later years are higher than near-term ones, a long fix costs more per unit; when they are lower, it may cost less. Suppliers also price in the chance that the market moves against them while they wait to buy energy for you, which is one reason the same business can get different quotes an hour apart. If you prefer, a flexible contract lets the supplier buy in tranches, which spreads timing risk but leaves you exposed to the market. Our comparison of fixed and flexible contracts explains that trade-off.
Layer 5: tax
Finally, the Climate Change Levy (0.801p/kWh from 1 April 2026, 0.827p/kWh from 1 April 2027) and VAT (usually 20%, or 5% for qualifying small or non-business use) are added. See VAT and Climate Change Levy.
Worked example: how a quote is built
The split between layers below is invented purely to show the structure; it is not a real cost breakdown. It is for a business using 15,000 kWh of electricity a year:
| Layer | Illustration (p/kWh) | Annual (15,000 kWh) |
|---|---|---|
| Wholesale energy | 10.0 | £1,500 |
| Network and policy costs | 14.0 | £2,100 |
| Supplier risk, costs, margin and any broker fee | 2.5 | £375 |
| Subtotal | 26.5 | £3,975 |
| CCL at 0.801p | 0.801 | £120.15 |
| VAT 20% on £4,095.15 | - | £819.03 |
| Total | £4,914.18 |
Daily standing charges would be added too. Note that a 20% move in the wholesale layer (£300) would shift the total by about £360 once VAT is added, whereas the layers set by regulators would not move.
Why your price doesn't match the news
- A fixed contract reflects the market on the day you agreed it, so it lags later moves.
- Quotes are often valid only for a day or so because supplier prices are refreshed with the market.
- Out-of-contract and deemed rates are set by the supplier and are often higher than a negotiated fix. See deemed contracts.
There is no Ofgem price cap for business energy, so the layers above are not capped; protection comes from contract terms and the rules on how suppliers must treat microbusinesses.
What this means for you
Because price is layered, the lever you control is the contract: the term, the timing and who you buy from. You can also reduce your units through efficiency, and check each layer is fair in the Principal Terms. Keep a record of the date and the rates of every quote you receive, so you can see how far they move week to week and judge whether an offer is out of line. A short table of supplier, term, unit rate, standing charge and broker fee is enough. For the outlook rather than the mechanics, see the business energy price forecast guide.
Next steps
- Ask your supplier or broker for the Principal Terms and check the broker fee.
- Ask whether the quote is fixed or pass-through.
- Get at least three quotes the same day so they reflect the same market.
- Learn your standing charge and unit rate.
Common questions on this topic
- Why doesn't the household price cap apply to businesses?
- How do I work out my annual business energy cost from unit rate and standing charge?
- Why is business electricity so expensive compared with domestic?
- Will business energy prices fall in 2027?
- What is a day rate and night rate on a business electricity tariff?
- Is gas or electricity cheaper per kWh for a business?
Sources
General information only. Energy prices, rules and supplier terms change; check the latest position with your supplier, Ofgem or the Energy Ombudsman before you act.