How Business Energy Contracts Work: A Beginner’s Guide

A Business Energy Contract Is a Commercial Agreement Between You and a Supplier. Understanding Its Structure Prevents the Most Expensive Mistakes in Energy Management.

Business energy contracts are not like most commercial agreements you’ll encounter. They are fixed-term, competitively priced, individually negotiated supply arrangements — with specific notification requirements, embedded commission structures, and auto-renewal provisions that differ significantly from both domestic energy tariffs and most other business contracts. The businesses that manage their energy costs well understand how these contracts work. The businesses that overpay don’t.

This guide covers the mechanics of how a business energy contract is structured, what each element means, and the points at which the structure creates either opportunity or risk.

The Two Parties

A business energy contract is an agreement between two parties:

The business customer: You — the organisation responsible for the premises at which energy is consumed. The contract is entered into by the legal entity occupying the premises: the limited company, partnership, sole trader, or other organisation that is billed for the supply. It is the legal entity, not the individual signing on its behalf, that is the contracting party and that carries the obligations.

The licensed energy supplier: A company licensed by Ofgem to supply electricity or gas to non-domestic customers in Great Britain. There are approximately 20–30 active licensed non-domestic energy suppliers in the UK market at any given time. Your contract with that supplier gives them the right to be the registered supplier against your Meter Point Administration Number (MPAN) or Meter Point Reference Number (MPRN) for the duration of the term.

The Core Commercial Terms

Every business energy contract contains the following commercial terms, which together determine your total cost over the contract period:

Unit rate: The price per kilowatt-hour (p/kWh) of energy consumed. This is the primary cost driver and the most quoted figure in procurement comparisons. On a fixed all-inclusive contract, this rate does not change for the contract term. On a pass-through contract, the wholesale component is fixed but some other components may vary.

Standing charge: A fixed daily charge for maintaining the supply connection, expressed in pence per day. Multiplied by 365 for the annual standing charge cost. This runs regardless of consumption.

Contract term: The duration of the fixed price commitment — most commonly 12, 24, or 36 months. The term defines the period during which the contracted unit rate applies and during which early exit carries a financial penalty.

Contract start date: The date on which the new contract begins. For supplier switches, this is the date the new supplier takes over the registered supply from the outgoing supplier. For contract renewals with the same supplier, it is the date the new terms come into effect.

Contract end date: The date on which the current fixed term expires. This date — and the notification deadline that precedes it — is the most commercially important date in the contract. Missing the notification deadline typically triggers auto-renewal.

The Notification Window and Auto-Renewal

The notification window is the period before contract expiry during which you must give formal notice of your intention not to renew in order to avoid the contract rolling over automatically. This is the clause that causes the most financial damage to business energy customers who don’t know it exists.

The notification window is typically stated in the contract terms as a number of days before contract expiry — commonly 30, 60, or 90 days. Some contracts specify longer windows. The clause means that if, for example, your contract expires on 31 October and your notification window is 60 days, you must have given written notice of your intention not to auto-renew by 2 September. If you miss this date, the contract rolls over for the auto-renewal term — typically the same length as the original contract — at the supplier’s renewal rate.

The renewal rate is not negotiated. It is set by the supplier at their commercial discretion and is typically above the competitive market rate. The financial consequence of an auto-renewal that goes unnoticed can be substantial — on a £50,000 per year energy spend, a 20% above-market renewal rate represents £10,000 per year locked in for the auto-renewal term.

Broker Commission Within the Contract

If your contract was arranged through an energy broker or consultant, the broker’s commission is embedded within the unit rate. The supplier adds a pence-per-kWh uplift to their base rate — the rate at which they would supply without a broker involved — and passes this to the broker as periodic commission payments over the contract duration.

This commission is a real cost to your business. It appears within your unit rate, not as a separate charge. You have the legal right to know how much commission your broker receives — Ofgem’s TPI Code of Practice requires disclosure on request. A broker who cannot or will not provide this figure when asked is not operating in compliance with the code.

Early Termination

Fixed-term business energy contracts include early termination provisions that make exiting before the end date financially costly. The early termination charge is typically calculated as the supplier’s mark-to-market cost — the financial loss they incur if they have to unwind the forward energy purchases they made to hedge your contracted rate.

In a falling market, where current energy prices are lower than your contracted rate, the mark-to-market cost can be significant — sometimes representing several months of contracted energy spend. In a flat or rising market, the cost may be lower.

Early termination is occasionally economically rational — if contracted rates are significantly above current market levels — but requires a calculation to verify. The early termination cost must be compared to the saving available from re-contracting at current rates over the remaining contract term. We run this calculation for clients on request.

Consumption Tolerance

Many business energy contracts include a consumption tolerance clause — a defined band around the contracted consumption volume within which the supplier will supply at the agreed unit rate without penalty. Consumption significantly above or below the contracted volume may result in reconciliation charges or re-pricing.

For businesses with predictable consumption, this is rarely an issue. For businesses with variable output — seasonal operations, manufacturing with variable production schedules, hospitality with significant occupancy variation — understanding the tolerance band and ensuring the contracted volume reflects likely actual consumption is an important part of contract structuring.

What Happens at Contract Expiry

At contract expiry, one of three things happens:

1. A new contract with a new supplier begins — if you have executed a competitive renewal in advance.
2. A new contract with the same supplier at the renewed rate begins — if auto-renewal was triggered by a missed notification window.
3. The supply continues on an out-of-contract or deemed basis — the most expensive outcome, where no renewal occurred and no new supplier has registered.

The first outcome is always the goal. The process that produces it — competitive market comparison starting 5–6 months before expiry, executed with adequate lead time — is what Telnergy manages for every client.

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Telnergy Limited • Independent Energy Consultants since 2002 • Ofgem TPI Registered • Christchurch, Dorset