Buying electricity for your business is like shopping at Costco.
In exchange for your purchase of a giant tub of peanut butter, you get a discounted price per unit. In places you can choose your electricity provider, the same concept applies to buying electricity for a business or commercial property. Since businesses presumably use more energy than a home, the rates can be cheaper.
The process of choosing an electric provider for a business, however, is far more complicated than setting up a new plan for a home. While home rate plans aren’t a one-size-fits-all program either, you can at least shop and compare online. Rate shopping for a business, however, is even more dependent on the business’s consumption profile, and you’re left to shop the old-fashioned way — by phone, chat, email or in person.
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The complicated rate shopping experience for a business doesn’t end there. Your rate quote will depend on your type of business, how much energy it uses and when. The good news is business rates can be negotiated, where a residential electric plan is predetermined.
“Deregulation in any industry, including energy, benefits the informed consumer, [especially those] who have more business to offer during the negotiation,” says Michael Kraten, director of accounting program initiatives at University of Houston’s C.T. Bauer College of Business. On the other hand, Kraten says, smaller businesses that use less energy have less buying power and may find the process time-consuming and burdensome.
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Here’s what business owners need to know about choosing their electricity provider.
Businesses and commercial properties can avoid overpaying for energy with a customized rate plan that is tailored to your property’s usage profile. Start saving on your utility costs today with a free commercial energy consultation.
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Factors to consider before rate shopping for your business
As every business is different, there are many factors to consider when choosing an electric provider.
Type of business: This is one of the most important factors when choosing an electricity provider. The type of business you have will determine how much energy it uses and when, which is the largest consideration in shopping and choosing the best rate, plan and provider for your business. That’s because a commercial or business rate and associated fees will be determined mostly by your business type, historical consumption and load factor.
For example, a factory will have higher electricity needs than an office setting. Since a factory is expected to use more energy than an office, the two quotes will look very different from each other with the higher usage business usually getting a cheaper rate.
Your current electricity costs: The cliche that you need to know where you’ve been to know where you’re going applies here. Kraten says the best way to figure out your current electricity costs is by analyzing at least a year’s worth of bills. This will not only tell you how much electricity you’ve used, but when you’ve used it. Every business uses energy differently. Some have usage that shifts hourly, some daily and some seasonally.
Consumption pattern: Your business or commercial property’s consumption pattern is the most important factor when shopping for electricity. Electricity providers will base a rate quote on how much electricity your property uses and how consistent that expected usage is by the hour, day, week, month and season. The more consistent a pattern, the cheaper the rate.
Load factor: Based on your business’s consumption patterns, it will be classified into one of three categories: high, medium or low load factor. These load factor categories establish the demand fees you may need to pay in addition to your electric rate cost. A property with a high load factor, for example, is one that uses energy in a predictable and consistent flow. Just like shopping in bulk at Costco, this energy profile tends to get the cheaper energy rate and lower demand costs since the energy grid can easily predict its patterns.
Conversely, a commercial property classified as low load factor uses power inconsistently or in high doses over short periods of time. Because of its unpredictable usage profile, this type of business will likely pay higher demand fees and electric rates.
Location: Where a business is located will determine what electricity providers, types of plans and rates will be available to you. First, not all states are deregulated — meaning you have a choice in energy providers. If your business is in a non-deregulated state it limits your choices in providers.
Second, each state is subject to its regulations and state-level costs which may factor into rates and associated fees. Third, each utility passes on its cost to deliver the electricity to your business. This cost is separate from the supply charge and electric provider and will affect your overall cost of electricity.
Length of contract: When it comes to electricity contracts and plans, the shorter the agreement the cheaper the rate. Kraten says a provider will charge a premium for the privilege of a longer commitment.
Market factors: Market factors across the globe can impact the price of electricity. The Russian war on Ukraine, for example, has a global influence on the price of energy. Then there’s less obvious factors, such as the power demand of crypto mining.
State and federal regulations: Laws and regulations set by the government can affect the overall cost of electricity outside of the supply charges (the rate per kilowatt-hour). Utility fees and tariffs, for example, are established by state governments. Delivery fees (also known as TDU fees) is the cost to deliver the electricity to a location. These fees are set and regulated by each state’s Public Utility Commission (PUC).
Also, whether you have a choice in providers at all is set by the state government’s decision on deregulation. Texas, for example, is a deregulated state with energy choice in providers for businesses and homes, while Arizona isn’t deregulated, and its residents and business owners don’t have a choice in providers.
Since commercial properties use more electricity than homes, the average commercial and business rates are lower across the US.
US EIAHow to shop, compare and switch electric companies
The most important factor to consider when shopping for an electric provider are price per kilowatt-hour, but there’s more to consider.
Type of plan: You also want to pay attention to the type of plan (such as fixed or variable rate), the fees associated with your consumption profile, the length of contract and whether you want your energy to come from renewables.
Check for licenses and customer reviews: It’s a good idea to make sure any entity you seek to do business with is licensed. In terms of reviews, it’s a good idea to look through them for both good and bad patterns. Kraten recommends checking official complaints with the state, since they’re harder to lodge. Your state PUC is the best place to check.
Do your homework: The process for switching or choosing your electric provider comes with homework on your part. A spreadsheet is helpful when shopping for business electricity plans and rates. Since there are more factors beyond just the rate itself, you’ll want to compare each plan and provider side by side with all associated fees factored in along with your expected usage. Basically, don’t look at just the rate. See how your bill can play out with all the fees factored in.
Get multiple quotes: Never take the first offer and get multiple quotes. Since consumption can fluctuate on a seasonal basis, ask each provider for a yearly and monthly estimate. Also ask if price matching is an option. Price matching means you use a quote from one provider to negotiate with another to see if they will match it. Keep in mind, a provider probably won’t take your word for it. So get it in writing.
What to expect: Once you’ve found a supplier you like the process for switching is fairly simple. A business credit check may be performed before a contract is signed. Upon signing a contract, your new rates should be reflected within your utility’s next billing cycle or two.
Try an energy broker: A trusted energy broker who can help you shop between providers is worth considering especially if you’re new to the process. Some energy brokers are paid via a finders fee from the electric company they secure your business with. Some earn a commission from you, the consumer. Make sure you know who pays a broker’s commission before working with them. Energy brokers are a third party and unrelated to the electric company giving the rate quote. Brokers don’t carry the same licenses as the electric providers, so be sure to check out reviews and licenses for both.
The benefits of switching or choosing a supplier for you business
Energy deregulation gives you choices when it comes to shopping for electricity for your business. While this can result in significant savings, the pendulum tends to swing both ways: Your business can find itself in a bad deal, paying more for electricity then you expected. That’s why it’s important to take your time to research rates, fees, plans and providers and make sure to read the fine print before making any decisions.
Pros
- If you find terms you like, it can lead to significant savings for your business.
- There’s more flexibility when shopping for an electricity supplier in terms of fixed versus variable rates, length of contract and source of electricity.
- Switching gives you the option to get your electricity from renewable sources.
Cons
- Getting the best deal for your business can require a lot of work on your part.
- Larger businesses typically hire someone like a broker, which costs extra.
- Locking yourself in with an unscrupulous energy provider can leave you paying more.
FAQs
Why are electric rates for my home higher than business rates?
Typically, businesses have larger energy needs than most homeowners, so they therefore have more leverage when buying electricity. The larger the business, say a factory, the more negotiating power they’ll have with an electricity provider hungry for customers. Think of it like buying something in bulk — it’s typically cheaper than buying smaller amounts.
Can I shop for business rates online?
Typically, business and commercial energy rates are not advertised online as with residential energy rates. You’ll have to contact suppliers directly to get their rates, or hire a broker to shop on your behalf.
