Articled updated July 2026
Wholesale electricity prices on Australia's National Electricity Market can swing from below zero to many thousands of dollars per megawatt-hour on the same day and that volatility is exactly what your retailer is pricing in when they quote you a stepped or smooth rate.
When working with our team of dedicated energy brokers for your next business electricity contract, you’ll likely hear a range of procurement strategies and terms that may seem really foreign but are really important. "Stepped and smooth" bill pricing strategies are some of those terms.
These describe how your rate changes across your contract term, not how your rate changes based on how much electricity you use, a different concept some retailers also call a "stepped" tariff.
Here is our handy guide on the differences between the two bill pricing strategies to help identify what might work best for your business.
Article Highlights
- Large market businesses (roughly 100MWh+ of electricity a year) can choose between stepped and smooth pricing when they lock in a contract
- Smooth pricing keeps one flat rate for the whole term simple to budget, usually a little more expensive
- Stepped pricing starts higher in year one and steps down in later years usually cheaper overall, but front-loaded
- The right choice depends on your business's cash flow and how long you're locking rates in for
- "Stepped" and "smooth" describe your contract's rate structure, not a usage-based tariff or a bill payment plan
Bill pricing strategies for large market contracts
As a big energy user, your usage is classified as “large market” (most Australian states set this threshold at around 100MWh a year, though it varies slightly by state) and your pricing is typically priced for a term length of 12, 24, 36, 48 or 60 months. There are two main ways these term lengths will be priced; Stepped or Smooth, which both offer a range of pros and cons for your business cashflow.
What is Smooth pricing?
Smooth pricing is when the usage rates are smoothed over the term length. This means the same peak, shoulder and off peak rate will be locked in for the entire term length selected.
For an energy retailer, there is more risk involved in forecasting the market and therefore they place a premium on smoothed pricing to build in more protection to their pricing model.
Retailers manage this by buying supply through wholesale hedging contracts; the further out they're forecasting, the less certain that forecast becomes.
Pros of smooth pricing:
- Ideal for cash flow and forecasting purposes knowing that the usage rates are fixed
- Easier to understand
Cons of smooth pricing:
- Typically slightly more expensive than stepped over the duration of a term that’s 24 months or longer.
What is Stepped pricing?
Stepped Pricing typically starts at a higher amount for year one, and then steps down in years two and beyond.
As energy retailers are able to price more accurately based on the current year and future year forecasts, this strategy is more risk-averse for electricity retailers than smooth pricing and therefore often cheaper for a business.
Pros of stepped pricing:
- Typically cheaper than smooth pricing
- More often than not, the longer you lock in rates for, the cheaper pricing gets in the later years of the contract.
Cons of stepped pricing:
- More often than not, the first year is more expensive and the benefits of this model are only realised the longer the contract goes for.
- It’s harder to understand and forecast for some businesses, particularly if there is a change in businesses energy consumption over time.
A pricing example
Picture a three-year contract. Under smooth pricing, your rate might sit at the same level in years one, two and three. Under stepped pricing, that same retailer might set a higher rate for year one, a middle rate for year two, and a lower rate for year three, averaging out to a lower total cost, but with the biggest bill landing first.
Which one works better depends on your business's cash flow: if you can absorb a higher cost in year one for savings later, stepped often wins. If you need predictable, level costs from day one, smooth is usually the safer choice.
Stepped and smooth FAQs
What does stepped pricing mean for a business electricity contract?
Stepped pricing means your rate is set higher in year one and steps down in later years of the contract, rather than staying the same for the whole term. It's different to a "stepped" or "tiered" tariff that changes your rate based on how much electricity you use.
What does smooth pricing mean?
Smooth pricing means one rate. The same peak, shoulder and off-peak pricing is locked in for the entire contract term, with no year-to-year change.
Is smooth pricing the same as bill smoothing?
No, bill smoothing is a payment plan that spreads your estimated bill into smaller, regular instalments. It doesn't change your electricity rate. Smooth pricing is a contract structure that keeps your rate flat for the whole term.
What counts as a large market business?
Most Australian states classify a business as large market once it uses more than around 100MWh of electricity a year, though the exact threshold varies by state.
Stepped or Smoothed, what is best for your business?
As you can see, stepped and smooth pricing strategies have pros and cons and either may suit a business depending on their scenario, cash flow status and overall priorities.
While smoothed may be better for budget forecasting, often stepped can provide better cashflow if over a long term.
Speak with your dedicated Choice Energy broker if you’re unsure about what the best option is for your business energy contract or give us a call on 1300 304 448.
