Fixed or variable business energy contract: how the options really differ

Fixed or variable is the first choice most businesses face when a contract comes up for renewal, and it is rarely explained well. Fixed sounds safe, variable sounds risky, and the truth has more detail than either word suggests.

Below we set out how each contract type works, using Ofgem and Citizens Advice as our sources. We are an introducer, so we do not recommend one over another. Our job is to help you ask better questions and see the options side by side.

The main business energy contract types

Ofgem lists several types of business energy contract, and says suppliers may not offer all of them. Here they are in plain English:

Business contracts also differ from household ones in several ways that Ofgem highlights: they can last up to five years or more (most are one to three years), they are usually single-fuel rather than dual-fuel, there is not normally a cooling-off period, and you do not need to sign anything for a contract to be binding. Agreeing on the phone counts.

How a fixed-rate contract works

With a fixed-rate contract you pay a set price for each unit of energy for the length of the term. Ofgem says that if energy prices go up you still pay the same, and if prices go down you also still pay the same. Ofgem’s 2022 advice for non-domestic customers makes a point that is easy to miss: a fixed rate does not fix your total bill, because the bill still goes up or down with how much energy you use.

What a fixed rate gives you

• Predictability. The same unit rate every month for the term makes budgeting simpler.
• Protection from market rises during the term. If wholesale prices climb after you sign, your unit rate does not.
• A clear end date. Fixed contracts include a switching window, a period that opens a few months before the end when you can renew or tell your supplier you are leaving.

What to watch for

• You stay on the price if the market falls. You do not benefit from cheaper wholesale prices until the term ends.
• Leaving early. Ofgem says most suppliers will not let you switch before the end of the contract unless a termination clause applies or you pay an exit fee.
• Conditions and pass-through costs. Ofgem notes some contracts allow the supplier to change the rate during the contract. Its 2022 advice adds that some elements, such as environmental costs, may be offered on a pass-through basis, added when the charges are known. Ask which parts of the price are fixed.
• What happens at the end. If you do nothing you could roll onto a more expensive default or rollover contract.

How a variable-rate contract works

Ofgem describes a variable rate as one where what you pay can go up or down during the contract, for example when wholesale prices change. Its 2022 advice says the standing charge and the rate per unit could both change through the contract.

What variable can offer

• Flexibility. Ofgem says that with a variable-rate contract you can switch to a new supplier at any time.
• Movement in both directions. If the market falls, your rate may fall too.

What to watch for

• Budget uncertainty. Your costs can change month to month, which can be hard to plan around.
• No protection if prices spike. The same link to the market that helps when prices fall hurts when they rise.
• How the price is set. Ask what triggers a change, how much notice you get and whether there is any cap.

Ofgem also says that if your fixed contract has expired you may be on a rolling or evergreen contract, out-of-contract rates or a deemed rate, and that with these variable arrangements you can switch at any time. The catch is that they are often the most expensive way to buy energy. See our guide to out-of-contract and deemed rates.

Flexible contracts: a different animal

Ofgem describes flexible (sometimes called structured) contracts as suitable for large businesses that use a lot of energy. Rather than locking into a fixed price, they allow companies to buy energy in smaller portions when market conditions are better. That takes active management and a strong appetite for market movement, so they are usually a conversation for larger users rather than a typical small business.

Questions worth asking before you choose

Whichever type you consider, Ofgem and Citizens Advice suggest checking the same core points. We have turned them into a checklist you can use with any supplier, broker or introducer:

1. How long is the term, and when does the switching window open?
2. What exactly is fixed? Unit rate, standing charge, and any third-party or environmental costs.
3. Can the supplier change the price during the term? Under what conditions?
4. What are the exit or termination fees? Ofgem says to check what fees are involved, including those in special clauses.
5. What happens at the end? Automatic rollover, out-of-contract rates or a deemed rate.
6. Are any broker fees or commissions included in the price? Ofgem lists this as something to know before you agree.
7. Can I see it in writing? There is no cooling-off period, so ask for the full terms first.

Is fixed or variable better for my business?

We cannot say, and anyone who gives you a one-line answer without seeing your situation should make you wary. It depends on how much a price rise or fall would matter to your cash flow, how much you use, how long you will be at the premises, and what is on offer when you look. What we can do is show you real options from 50+ suppliers through our energy partner, so you can compare them against your own bill and decide.

Matching the contract to the shape of your business

We cannot tell you which type to choose, but we can point to the factors that Ofgem and Citizens Advice keep returning to. Use them as prompts when you look at any offer.

Three questions to settle before you compare prices

1. How would a 10% rise in your energy cost affect your month? If you could not absorb it, price certainty may matter more to you. If you could, flexibility may.
2. How sure are you about the premises? A longer fixed term makes more sense for a site you will keep than one you may leave. Ofgem says you will usually be tied in until the switching window.
3. Who will diarise the end date? Whichever type you choose, the end of the term is where default rates begin. Put the switching window in your calendar the day you sign.

These are not rules. They are the prompts we would use if we were looking at a renewal letter ourselves.

Frequently asked questions

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