Buying electricity for your business is like shopping at Costco.
If you buy a large container of peanut butter, you get a discount on the price per unit. In places where you have a choice of electricity provider, the same concept applies to purchasing electricity for a business or commercial facility. Businesses likely use more energy than homes, so they may get lower rates.
But choosing an energy provider for your business is a much more complicated process than setting up a new plan for your home. While residential rate plans aren't a one-size-fits-all program, they can at least be compared online. But choosing a business rate plan depends even more on your business's consumption profile, and you'll likely have to shop the old-fashioned way – by phone, chat, email, or in person.
The complexities of rate comparison for businesses don't end there. Rate quotes vary depending on the type of business, energy usage, and time of year. Luckily, while residential electricity plans are predetermined, business rates are negotiable.
“Deregulation in any industry, including energy, benefits more informed consumers. [especially those] “Companies that can offer more business during negotiations have an advantage,” says Michael Kreiten, director of accounting program initiatives at the University of Houston's C.T. Bauer College of Business. Meanwhile, smaller businesses with lower energy consumption may have less buying power and find the process time-consuming and cumbersome, Kreiten says.
Here's what business owners need to know when choosing an electricity provider.
Factors to consider before comparing rates for your business
Every business is different, so there are many factors to consider when choosing an energy provider.
Type of business: This is one of the most important factors when choosing an electricity provider. The type of business you have determines how much energy you use and when you use it. This is the most important thing to consider when looking for the best rate, plan, and provider for your business. This is because commercial or business rates and associated fees are primarily determined by the type of business, your historical consumption, and your load factor.
For example, a factory has a higher demand for electricity than an office. As a factory is expected to use more energy than an office, the two quotes will be significantly different and the business with higher usage will usually get a cheaper tariff.
Current Electricity Bill: The cliché holds true here – to know where you're going, you need to know where you've been. Kraten says the best way to understand your current electricity bill is to analyze at least a year's worth of bills. This will tell you not only how much electricity you've used, but also when you used it. Every business uses energy differently. Some use hourly, some daily, and some seasonally.
Consumption Pattern: The consumption pattern of your business or commercial facility is the most important factor when purchasing electricity. Electricity companies base their rate quotes on your facility's electricity usage and how stable that usage is from hour to hour, day to day, week to month, and season to season. The more stable the pattern, the lower your rate.
Load Factor: Based on your business' consumption patterns, you'll be classified into one of three categories: high, medium, or low. These load factor categories determine the demand charges you'll have to pay in addition to your electricity bill. For example, a property with a high load factor is one that uses energy in a predictable and consistent stream. Just like buying in bulk at Costco, this energy profile tends to result in lower energy bills and lower demand costs because the patterns are easier to predict on the energy grid.
Conversely, commercial facilities that fall into the low load factor category use electricity erratically or in large amounts over short periods of time. Due to their unpredictable usage profile, this type of business is more likely to pay higher demand charges and electricity bills.
Location: Where your business is located will determine what energy providers, plan types, and rates are available to you. First, not all states are deregulated, which means you have a choice of energy provider. If your business is in a state that isn't deregulated, your choice of company will be limited.
Second, each state has regulations and state-level costs that can affect rates and associated fees. Third, each utility company passes on the costs of delivering electricity to your business that are separate from the delivery fee and utility company and affect the overall cost of electricity.
Contract length: When it comes to electricity contracts and plans, the shorter the contract term, the cheaper the price, and Klaten says providers will charge a premium for the privilege of a longer contract.
Market factors: Market factors around the world can affect electricity prices – for example, Russia's war in Ukraine will have a global impact on energy prices – as well as less obvious factors such as the electricity demands of cryptocurrency mining.
State and Federal Regulation: Government laws and regulations can affect the overall cost of electricity beyond the supply price (price per kilowatt-hour). For example, utility rates and tariffs are set by state governments. Delivery charges (also known as TDU charges) are the cost of delivering electricity to a specific location. These charges are set and regulated by each state's Public Utility Commission (PUC).
Additionally, the ability to choose a provider is determined by state government deregulation decisions. For example, Texas is a deregulated state that allows businesses and homes to choose their energy provider, while Arizona is not deregulated and does not allow residents or business owners to choose a provider.
Commercial properties use more electricity than residential properties, so the average commercial and business rates across the U.S. are lower.
US Environmental Impact Assessment
How to compare and choose electricity companies
While the most important factor to consider when choosing an electricity supplier is the price per kilowatt-hour, there are other things to consider as well.
Type of plan: You should also take note of the type of plan (e.g. fixed or variable tariff), the tariff related to your consumption profile, the contract period and whether you want your energy from renewable sources.
Check for licenses and customer reviews: It's a good idea to check if the organization you want to do business with is licensed. When it comes to reviews, it's a good idea to check for both good and bad patterns. Kraten recommends checking for official complaints to your state, as it can be difficult to file a complaint. The best place to check is your state's PUC.
Do your homework: The process of switching or choosing an electricity provider requires some homework on your part. When considering business electric plans and rates, a spreadsheet can help. There are factors beyond the rate itself, so you should compare each plan and provider side-by-side, taking into account your expected usage and all the associated fees. Essentially, don't just look at the rate, but see what your bill will look like when you factor in all the fees.
Get multiple quotes: Never go for the first proposal, get multiple quotes. As your consumption fluctuates seasonally, ask each provider for annual and monthly quotes. Also, ask if price matching is an option. Price matching means using a quote from one provider to negotiate with another provider and see if they will match your quote. Keep in mind that the provider probably won't take your word for it. So, get it in writing.
What to expect: Once you find a supplier you like, the process of switching is very simple. A business credit check may be conducted before you sign a contract. Once you sign the contract, your new rates should be reflected within the next one to two billing cycles from your utility.
Try an energy broker: A trusted energy broker who can help you compare providers is worth considering, especially if you're new to the process. Some energy brokers are compensated as a brokerage fee by the energy company that secures a deal for you. Some brokers receive their commission from you, the consumer. Before dealing with a broker, find out who pays the broker's commission. Energy brokers are third parties and are not associated with the energy companies that provide rate quotes. Brokers do not hold the same licenses as energy providers, so check the reviews and licenses of both.
The benefits of switching or choosing suppliers for your business
Energy deregulation gives you more choice when it comes to buying electricity for your business. While this can result in significant savings, it can also go either way – you could end up with a bad deal for your business and paying more for your electricity than you expected. That's why it's important to take the time to research rates, fees, plans, and providers, and always read the fine print before making a decision.
Strong Points
Finding the terms you like can result in significant savings for your business. Fixed and variable rates, contract lengths and power sources give you more flexibility when choosing your energy supplier.
By switching, you give yourself the option to get your electricity from renewable energy sources.
Cons
Getting the best deal for your business can take a lot of effort. Larger companies usually hire people like brokers, which incurs additional costs.
If you sign a contract with a bad energy supplier, you could end up paying more.
FAQ
Why is my home electricity bill higher than my business electricity bill?
Businesses usually have bigger energy needs than most homeowners, and therefore more clout when it comes to buying electricity. The larger a business is, like a factory for example, the more negotiating power it has with power companies that want customers. Think of it like buying anything in bulk: it's usually cheaper than buying in smaller quantities.
Can I find business rates online?
Business and commercial energy rates aren't typically advertised online like residential energy rates are – to find out the rate you'll need to contact the supplier directly or hire a broker to look up the rates on your behalf.