There are several key differences between business energy, or commercial energy, and residential energy rates, billing, and retail energy supplier contract terms. This article aims to outline the key factors that differentiate commercial electricity rates from residential rates, and how to utilize this information to take advantage of energy deregulation in your state.
What Is Business Energy
Business energy rates, otherwise known as commercial rates, are classified as the energy needed to power a commercial facility, factory, or municipal building. In most utilities throughout the United States, commercial electricity bills have their own tariff schedules and are billed quite differently than residential accounts. Since businesses consume lots of electricity, and often in very different ways, there are certain measures put in place by electricity companies to properly account for commercial electricity consumption. In summary, business energy is extremely important for the well-being and operation of the economy. Without a reliable source of energy, businesses and industrial facilities would not be able to operate or produce goods and services.
What Is Residential Energy
Residential energy, on the other hand, is the electricity needed to power homes throughout the United States. Residential electric rates differ from commercial power prices, and are often simpler to understand. Residential energy supply is vital for a well-functioning community as energy heats homes, provides air conditioning, and is essential for modern life.
Is Business Energy Cheaper Than Residential?
In most cases, industrial energy and commercial energy prices are less expensive than residential rates. Since businesses typically consume much more electricity than homes, energy suppliers tend to offer them lower electricity rates. Furthermore, commercial energy markets are much more competitive, so energy suppliers must be willing to make less profit margin when selling electricity to commercial customers.
The Differences Between Business And Residential Rates
Business energy rates, otherwise known as commercial rates, are quite different from their residential counterparts. Although all electricity comes from the same electrical grid and energy suppliers, commercial power prices can vary substantially due to the way the energy is being consumed by the business. Here are some of the key differences between commercial and domestic electricity:
| Rate Type | Products | Contract Terms | Usage Requirements | Pricing Process | Enrollment Process |
|---|---|---|---|---|---|
| Residential | Fixed; Variable | Simple termination language (sometimes no fee) | Flexibility around usage requirements | One-size-fits-all pricing | Online enrollment is typical for immediate starts |
| Commercial | Fixed; Variable; Hybrid (fixed + variable) | Complex, binding contract terms with hefty early termination penalties | Strict bandwidth clauses and material change penalties | Custom pricing by rate class, load profile, and capacity tags (load factor) | Wet or digital signature is required. Online enrollments for small commercial only. Future start dates are available up to 5 years. |
In addition to the differences outlined above, there are extreme differences in how residential electric rates are determined compared to commercial electric rates.
Rates and Pricing
Rates and pricing vary tremendously from residential to commercial electric products. Residential rates are straightforward and easy to understand. They are typically represented as fixed or variable rates with minimum or no cancellation penalties. Commercial products, on the other hand, are complex and subject to binding contract language. Commercial rates are priced based on each business’s individual load profile and can vary business-to-business and supplier-to-supplier based on several factors, such as:
- Supplier pricing risk models
- The business’s load factor
- Utility rate tariffs, or rate codes
- Contract start dates
Billing & Demand Charges
Most commercial electricity bills are complex to understand. Since commercial businesses consume electricity at a very rapid rate, electricity utilities and suppliers have enacted certain billing measures to protect themselves from high electricity consumption. One of the key parts in the anatomy of a commercial electric bill is the demand charge. Unlike a residential electricity bill that simply has a rate per kilowatt hour ($/kWh), commercial customers pay fees for the total amount of electricity they demand in any given period. Demand charges are also known as distribution fees, and are billed in dollars per kW ($/kW). And, understanding the differences between kW and kWh is critical to comprehending these charges.
Commercial demand charges in the summer months dictate capacity cost obligations that the business must pay to the electric supplier. These prices are built into fully-bundled fixed prices and change based on the business’s specific demand profile. Residential demand, on the other hand, is not metered by utility companies and does not play a direct role in supply pricing. While still a factor on a larger scale, utility companies typically assign a load profile to their entire residential rate class.
Contract Language
Whether you are negotiating energy supply contracts for your business yourself or you’ve hired an energy broker to help you switch energy suppliers, commercial energy contract language is quite different from residential energy agreements. Here is how energy contracts differ from residential to commercial applications:
- Early Termination Fees: Commercial energy contracts have early termination fees associated with them in case the customer breaks the contract. Residential contracts do not usually contain these exit fee penalties.
- Usage Bandwidth: Some commercial customers may be obligated to contain their energy usage within a certain measure, or energy bandwidth allotment. This contract clause is known as energy bandwidth and is enacted to protect energy suppliers from under- or overpurchasing too much energy in the wholesale market on behalf of the commercial account.
- Material Change Contract Clauses: Commercial electric contracts contain material change clauses that require businesses to report material changes in energy usage. In certain extreme examples, the business may be required to purchase additional energy usage at the then market price.
- Contract Start Dates: Because electricity trades in a forward market, suppliers offer future start dates to commercial customers. A customer could elect to lock in a fixed price starting next year based on market conditions. These future-dated contracts are not available to residential customers.
Energy Brokers
While most residential energy customers sign up for energy plans online, commercial customers usually hire energy brokers to find the lowest rates on their behalf. Because commercial energy is more complex, energy brokers are able to bring sophisticated knowledge of the energy markets and energy consumption to the table. This can help the commercial customer curtail costs and save money in the long run.
| Factor | Business Energy | Domestic Energy |
|---|---|---|
| Contract Length | 1-5 year fixed terms | 1-3 year fixed terms |
| Pricing | Negotiated, load-based | Standardized regional rates |
| Billing | Demand data impacts pricing | Demand is not directly applicable |
| Switching | Via broker or supplier | Online |
| Start Dates | Up to 5 years in the future | Immediate |
Frequently Asked Questions
Why is business electricity so expensive?
Business electricity can be expensive because commercial customers typically use larger volumes of power, face demand charges, and are exposed to capacity market pricing. Unlike residential rates, which are often standardized, business electricity pricing reflects real-time market conditions, localized grid congestion, and usage patterns. Factors like load factor and contract structure also play a major role in overall cost.
Is business electricity cheaper than residential?
Business electricity is not always cheaper than residential, but it can be more cost-effective on a per-unit basis. Commercial customers with steady, predictable energy usage may qualify for lower supply rates, while those with high peak demand may pay more. Residential customers often benefit from simpler rate structures.
Do home-based businesses count as domestic or business?
In most cases, home-based businesses are still classified as domestic (residential) electricity accounts, especially if the electric meter is classified as residential. However, if a business significantly increases electricity consumption, the utility may require a commercial classification.
Choosing The Right Commercial Energy Plan For Your Needs
If you own or operate a commercial business in a deregulated state, then choosing the right commercial energy plan is essential for your bottom line. Not all businesses consume energy in the same manner, and using an energy broker to match you with the right energy supply plan is critical. Energy brokers will evaluate your historical energy consumption profile to determine the best contract structure for your usage and risk profile. If you operate a 24 hour business and consume lots of power at night during off-peak hours, then you will benefit from a different product compared to a business operating only during the day. Choosing an experienced energy broker can help you better navigate pricing options and commercial energy suppliers so you can choose the plan that best suits you.
Need Help Navigating The Commercial Energy Market?
In summary, commercial energy is more complex and nuanced than the residential markets. It is imperative to understand how commercial consumption ties into electricity pricing and the different ways to negotiate the best deal for your business. At Diversegy, we offer expert advisory services for our commercial and industrial customers so they can reduce energy expenses. Contact us today to explore your options.
