How your small business's energy pricing is determined
  • Category:
    Energy Choice
  • Published:
    February 15, 2021

How Your Small Business’s Energy Pricing Is Determined

Ever wonder how electricity and natural gas are priced for small businesses? It’s an important question if you want to understand where your business’s energy costs come from. There are quite a few charges and fees that combine to make up your total costs, and each of them are worth knowing. This is in addition to the external factors that have an effect on the price you pay for energy.

By breaking down your small business’s energy price and understanding all the associated charges, you’ll be able to determine what your biggest energy expenses are and start taking steps to reduce them.

The different components of your business’s energy price

The total energy price for your small business is made up of various charges and fees. Some of these charges can be controlled through your energy usage patterns, while others are determined solely by your energy provider, or by the market.

Although the exact names and costs may differ depending on your energy provider or utility, here are some of the more common charges and fees that help determine the price of electricity for businesses.

Price of supply

The rate you pay for the actual energy you use is known as your price of supply. What this price is and how often it changes will depend on how your energy plan and rate are structured. For example, you may have a fixed- or variable-rate energy plan, or a “blend” of multiple plans. Each plan option offers a different price of supply, so the one you choose will have an impact on your business’s overall energy pricing.

The amount of electricity you use is measured and billed in kilowatt-hours (kWh). Understanding what a kWh is can help you curb your business’s energy consumption and limit your overall supply charges.

If your business operates on natural gas, your usage is measured in Ccf (or one hundred cubic feet). Additionally, you’re billed based on your price per therm. The average cost per therm of natural gas is always changing, and tracking these changes can help you prepare for shifts in your business’s energy price.

Capacity charges

Capacity charges are collected by energy providers in order to ensure that there’s enough energy to go around during times of peak usage. For example, extreme temperatures lead to more people using their air conditioning or heat, which use a lot of energy. Energy providers need to invest in the system to accommodate those times of high demand, and that cost is passed on to the customer.

Transmission fees

Another important electricity price component is your transmission fee. Transmission fees are assessed in order to cover the cost of transporting energy from the generation plant to the electricity distributor. Depending on your situation, this fee may be billed by either your energy provider or utility company.

Expected energy consumption

Energy providers will take your anticipated energy consumption into account when determining your overall energy price. For example, businesses who use more energy may end up paying more than other, less energy-dependent businesses. Unlike capacity charges, which account for energy use across the whole system, this cost is determined by your specific business’s energy use. That’s why it’s important to monitor and control how much energy your small business consumes.

Contract term length

The duration of your contract can impact how electricity is priced for your small business. By opting for a longer-term energy contract, you may be able to secure a lower price than if you went with a short-term option. When developing your small-business energy procurement strategy, you should establish your ideal contract length.

Ancillary charges

If you do a breakdown of your small-business energy price, you’ll see that a portion of it covers ancillary services. These services help to maintain and repair the energy system from which you draw your energy. As an example, if the electrical lines around your business are damaged during a storm, your ancillary charges may be used to pay for the labor and equipment it takes to restore them.

Energy losses

The final component of your electricity price is line losses. The charge for line losses covers the energy that’s lost between the generation and distribution phases. Between the years 2015 and 2019, an estimated 5% of all electricity transmitted and distributed in the United States was lost. Natural gas losses can also occur, meaning natural gas customers are subject to line loss charges, as well.

What goes into your business's energy price

Factors that influence your energy costs

The amount you pay for energy can fluctuate based on a number of factors. This can make fully understanding your energy costs a challenge. However, tracking these factors and staying on top of shifts in the energy market may be able to help you limit your expenses — especially for businesses considering variable-rate plans. Here are some of the factors that influence your small business’s energy costs the most.

The type of fuel your small business uses

Businesses in the United States have plenty of options when it comes to energy sources. For example, they may decide to use any combination of the following fuel types to power their facilities:

  • Electricity
  • Natural gas
  • Petroleum
  • Renewable resources

Each type of fuel has its own particular market cost that shifts based on changes in demand and availability. This means that the type of fuel your business uses will have an impact on your energy price. The cheaper and more readily available your fuel source, the lower your overall energy costs will be.

How close your business is to its energy supply

As outlined above, one component of your electricity price is transmission fees, which cover the transportation of your energy. However, not all businesses pay the same amount to have their energy delivered. Businesses that operate close to where their energy is generated may pay less for transmission fees than those that are located farther away.

The season or time of year

The demand for energy tends to rise or fall depending on the time of year. These changes in consumer demand can then have an affect on market energy prices. Increased consumption and demand drive energy prices up during certain seasons, and prices drop back down during lower-demand seasons.

Understanding energy market cycles

Energy markets tend to be cyclical, meaning you have the ability to track prices over time and predict upcoming changes. One example of this would be the seasonal energy cycle. When temperatures are extreme, demand for energy increases along with market prices. That’s why it’s best to try to secure your price during spring or fall, when electricity rates are lowest.

The current economic climate

The state of the economy can have an influence on energy market rates. For example, when the economy is booming, the demand for goods and services goes up. To meet this increased demand, businesses must ramp up production and distribution, which requires additional energy. As a result, energy prices are driven up. Knowing how the market affects energy prices can help you better anticipate and prepare for changes in your energy costs.

Extreme weather and natural disasters

Another factor that influences your small-business energy costs is extreme weather and catastrophic natural events. When inclement weather or natural disasters strike, the generation and transmission of energy can be disrupted. Take 2017 for example, when a series of hurricanes reduced the amount of natural gas being produced in the Gulf of Mexico. With less energy in production, market prices were temporarily driven up.

Government action

Government entities are capable of affecting the price of energy through tax and regulatory policy. For example, the U.S. Department of Energy created the Strategic Petroleum Reserve to secure energy supplies in case of emergency disruptions, such as what may happen during hurricane season. This helps ensure that energy prices remain stable if a hurricane disrupts generation or transmission.

States can also affect costs by allowing energy choice, where customers can choose among energy providers. Having choices leads to competition and can keep prices low and innovation up.

The global energy market

When changes in the global energy market occur, it has the potential to affect how energy is priced in America. As an example, the United States is a net importer of crude oil, meaning we import more than we export. So, if the generation or distribution of crude oil is disrupted in the countries we import from, our supplies will drop. The less crude oil we’re able to import, the higher the market prices will rise.

Securing the best energy price for your small business

Breaking down your small-business energy price can help you determine exactly what you’re being charged for each month. You’ll be better able to identify the factors that influence your energy costs the most, and start looking for ways to limit your expenses.

Following some small-business energy-saving tips can be an effective way to reduce your energy costs. But to maximize your savings, you may want to reconsider your business’s energy plan. There are many small-business energy solutions to explore, so be sure to shop around and compare rates until you can secure the best energy price for your business.

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