Energy Contracts: You’re either ‘OK’ or ‘Up a creek without a paddle’

The Metal Magazine: Energy Contracts, Liam Conway

Let’s be clear, the last 18 months have been utter chaos in the energy market.

We’ve seen extraordinary turmoil in energy markets, leaving many businesses scrambling for solutions and wrestling with costly, poorly advised decisions.

What seemed like prudent choices at the time have now left some searching for ways out of egregious contracts and struggling with energy bills representing an immense burden.

When energy contracts feel like an incessant headache, it’s all too easy to make hasty judgments and sign away security and stability without realising the price. Some businesses have learned this lesson the hard way, at a cost that in some cases threatens their very survival.

Let’s cover a few painful examples from businesses who came to us too late and asked for help after they’d signed a contract which they now realise was the wrong thing to do.

Example 1: Heat Treatment

Heat Treatment business, contracts due October 2022, signed a 2-year fixed electricity contract at 70p p/kWh on the advice of a broker as being a smart option given costs were only going to increase. Energy is now 60% of their turnover and they can’t do anything about it.

The market rate, by the way, is circa 28p p/kWh now!

Example 2: Automotive

Automotive business, contracts due October 2022, signed a 4-year fixed electricity contract at 46p p/kWh again on the advice of a broker.

They’re now paying circa £2.5m pa over the market rate.

So why and how do businesses sign these contracts?!

Some background; Energy brokers typically earn their commission/fee via a margin in the unit rate. This doesn’t have to be declared, it’s not transparent and most people haven’t got a clue how much they’re paying.

Just for clarity, we declare the commission/fee; there’s nothing to hide.

The longer the energy contract, the more the broker earns given the revenue is secured for a longer period. There’s nothing wrong with longer-term contracts, whether they be fully fixed or within a flexible framework. What was wrong last year was to tell businesses that their only option was a longer-term fixed contract at a point that the market was sky-high.

This advice has/will put businesses out of business, it’s that simple.

Let’s focus on the why

These are some of the reasons why businesses end up getting caught in unfavourable or outright harmful energy contracts.

I speak to lots of experienced business leaders who have fallen foul of the below, so if you recognise any of them and think that they apply to you, don’t worry but do learn!

  1. They’re bombarded to a point they just sign: Sounds ridiculous but it happens.
  2. They don’t do enough due diligence on alternatives.
  3. They’re put under time pressure: “Sign now or else the market’s going up” type situation.
  4. They fall for the snake oil of the salesman: How many businesses actually sit down with their broker? Most are glorified call centres – Think on!
  5. They don’t come from a trusted source: There are no qualifications to become an energy broker. How many people have they asked for recommendations for who they use? Have they asked the trade association they’re part of for advice?

Energy bills discount scheme

The Government has recognised that continued support for businesses is required, so will be replacing the Energy Bill Relief Scheme (EBRS) with the Energy Bills Discount Scheme (EBDS). The scheme will run for 12 months from 1st April 2023 to 31st March 2024 and will operate in the same way as EBRS, but with some price adjustments.

For Energy and Trade Intensive Users (ETIIs), this applies as follows:

  • Electricity – If the wholesale price exceeds £185 per MWh (18.5p per kWh), a maximum discount of £89 per MWh (8.9p per kWh) will be applied
  • Gas – If the wholesale price exceeds £99 per MWh (9.9 per kWh), a maximum discount of £40 per MWh (4.0p per kWh) will be applied

Flexible energy contracts

With the current energy crisis, the market can be volatile and difficult to navigate. Having a strategic long-term energy procurement plan can help you manage your energy requirements in a more cost-effective manner.

With a flexible energy contract, you can purchase energy for up to four years in advance and build a price made up of multiple purchasing decisions. This enables you to take advantage of wholesale market fluctuations and spread risk when the markets are high.

The longer the purchasing framework, the greater the prospect of minimising risk and exposure to volatility. For many industrial operators, this may prove the prudent path.

To find out more, you can download a free copy of our flexible energy eBook by visiting cec.uk.com/flex 

What you should do

Clients should be able to truly trust the people they are working with, and be sure that they are receiving sound advice that won’t leave them up a creek without a paddle!

Though finding the right energy contract may seem a difficult challenge, it is one that pales in comparison to what your business and its future could face if left unaddressed.

My advice is to ensure that you are receiving full and transparent information, in which all energy contract options have been presented. It’s important to maintain regular dialogue with your advisor and monitor their proactivity.

Demand transparency and ask questions until you have the answers you need to feel fully confident in the path ahead. Work with advisors and brokers who declare their interests openly and prioritise your needs above their commissions. And remember that flexibility and an exit strategy are not signs of weakness but essential safeguards against uncertainty.

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