Fixed-rate contract
What is a fixed-rate contract?
A fixed-rate contract is a business energy agreement that locks in your unit rate and standing charge for the whole of the contract term, usually somewhere between one and five years. The price you pay per unit does not change during that period, whatever happens to wholesale energy prices. It is the most common way UK businesses buy gas and electricity, chosen mainly for the budgeting certainty it brings. What it does not fix is your total bill, because you still pay for the units you actually use, so the amount you owe still rises and falls with consumption.
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Fixed-rate contracts are the default for most small and medium businesses, and they sit alongside variable, pass-through and flexible options. The defining feature is price certainty for a set term. Understanding exactly what is fixed, and what is not, is the key to judging whether one suits you.
What a fixed-rate contract is
A fixed-rate contract sets your unit rate and your standing charge at the start and holds them steady for the agreed term. Sign a three-year fix and the rate you agreed on day one is the rate you pay in year three, even if the wider market has doubled or halved in between. The supplier carries the risk of price movements during the term, and prices that risk into the rate they offer you.
It applies to both gas and electricity, and the principle is identical for each. For a gas-specific walk-through, our article on fixed-rate business gas contracts goes into more detail, but the definition here holds across both fuels.
What is fixed, and what is not
The fix covers the price per unit and the daily standing charge. It does not cap your total bill. If you use more energy, you pay more, because consumption still drives the final figure. A fixed rate gives you a known price, not a known total.
Most fixed contracts also fold the non-commodity costs, such as network charges, the Climate Change Levy and VAT, into the single rate. VAT is added on top as a separate line, but the policy and network costs are usually baked in, which is what makes the rate genuinely fixed rather than exposed to those moving parts.
How the rate is set
Your fixed rate is built from the wholesale cost of the energy at the moment you sign, plus the network and policy costs, plus the supplier’s margin and a risk premium for locking the price. Because the wholesale element is priced on the day, the same contract can be noticeably cheaper or dearer depending on when in the market cycle you agree it.
That timing matters. Two identical businesses signing the same length of fix a few months apart can end up on very different rates, simply because wholesale prices moved between the two dates.
Fixed vs variable and flexible
A variable rate moves with the market, so it can fall when prices drop but offers no protection when they rise. A pass-through contract fixes the wholesale part but lets the network and policy costs flow through at cost, so part of the rate still moves. A flexible procurement arrangement buys energy in tranches over time and suits large, expert energy buyers.
A fixed rate is the simplest of the lot. You trade the chance of catching a falling market for the certainty of a price you can plan around, which is the right call for most businesses that would rather not watch wholesale prices.
Strengths and trade-offs
The strength is certainty. You can budget for the year knowing your rate, you are shielded if the market spikes, and there is nothing to monitor once you have signed. For most small and medium businesses that is exactly what they want from an energy contract.
The trade-off is that you are locked in. If wholesale prices fall sharply after you sign, you keep paying the higher fixed rate, and leaving early usually carries a charge. You are also paying a small premium for the supplier to carry the price risk, which is the cost of the certainty.
Contract length and timing
Fixed terms typically run from one to five years. A longer fix gives more years of certainty and shelters you from more market movement, but it commits you for longer if rates later fall. A shorter fix keeps you flexible but means renewing, and re-pricing, sooner.
Timing the market perfectly is not realistic, but it is worth arranging your next contract a couple of months before your current one ends, so you are choosing your moment rather than being forced onto a default rate by a missed date.
What happens at the end
When a fixed contract ends, you do not simply continue on the same rate. If you have not agreed a new deal, you roll onto a deemed or out-of-contract rate, which is almost always the most expensive way to buy energy. The fixed rate protected you during the term, but that protection stops the moment the term does.
This is why the contract end date is the date that matters most. The certainty of a fix is only worth having if you act before it expires.
Who it suits
Fixed-rate contracts suit businesses that value predictable costs and do not want to manage energy actively, which describes the large majority of small and medium firms. If steady budgeting matters more than the chance of riding a falling market, a fix is usually the sensible default.
Larger or more sophisticated buyers may prefer pass-through or flexible arrangements to chase savings, but they take on more risk and more admin in return. For most businesses, the simplicity of a fixed rate is the point. Our business energy overview sets out how it fits with the rest of a bill.
Frequently asked questions
What is a fixed-rate energy contract?
A fixed-rate contract locks your unit rate and standing charge for the contract term, usually one to five years, so the price per unit does not change even if wholesale prices move. You still pay for the units you use, so your total bill varies with consumption.
Does a fixed rate fix my total bill?
No. It fixes the price per unit and the standing charge, not the total. If you use more energy you pay more, because consumption still drives the final figure. A fixed rate gives a known price, not a known total.
What happens if wholesale prices fall after I fix?
You keep paying your agreed fixed rate for the rest of the term, even if the market drops. That is the trade-off for the certainty: you are protected if prices rise but locked in if they fall.
How long do fixed-rate contracts last?
Typically between one and five years. A longer fix gives more years of price certainty, while a shorter one keeps you more flexible but means re-pricing sooner.
Can I leave a fixed-rate contract early?
Usually only by paying an early termination charge, because the supplier priced the deal around you staying for the full term. It is best to plan your next contract around the agreed end date rather than trying to exit early.
Is a fixed rate cheaper than a variable rate?
Not always. A fixed rate can be dearer or cheaper than a variable one depending on the market, because you pay a small premium for the supplier to carry the price risk. What a fix reliably gives you is certainty rather than the lowest possible price.
What is the difference between a fixed and a pass-through contract?
A fixed contract locks every element of the rate, while a pass-through contract fixes only the wholesale energy cost and lets network and policy costs flow through at whatever they turn out to be, so part of a pass-through rate can still move during the term.
Are non-commodity costs included in a fixed rate?
Usually, yes. Most fixed contracts fold network charges and policy costs like the Climate Change Levy into the single rate, which is what makes it genuinely fixed. VAT is then added on top as a separate line.
When is the best time to sign a fixed contract?
There is no way to time the market perfectly, since the wholesale element is priced on the day you sign. The practical advice is to arrange your next contract a couple of months before your current one ends, so you choose your moment rather than being forced onto a default rate.
What happens when my fixed contract ends?
If you have not agreed a new deal, you roll onto a deemed or out-of-contract rate, which is usually the most expensive way to buy energy. The fixed rate only protects you for the term, so acting before the end date matters.
Does a fixed-rate contract apply to both gas and electricity?
Yes. The principle is the same for each: your unit rate and standing charge are locked for the term. Many businesses hold a separate fixed contract for gas and for electricity.
Who should choose a fixed-rate contract?
Businesses that value predictable costs and do not want to manage energy actively, which is most small and medium firms. If steady budgeting matters more than chasing a falling market, a fixed rate is usually the sensible default.
Ofgem supply licence conditions (ofgem.gov.uk)