If you believe you are safe in a fixed energy contract you could be in for a nasty surprise

by Ian Sinkamba Business Energy News

If you believe you are safe in a fixed energy contract you could be in for a nasty surprise

Beware the small print: hidden charges and subtle contract clauses often mean that your energy bills can fluctuate – even if your deal claims to be “fixed”.

Whether it’s a mortgage or a utility bill, millions of us prefer to choose “fixed term” deals when we enter into contracts with suppliers and providers. While a fixed contract may mean that we miss out on any potential savings when costs go down – such as interest rates or oil prices – locking in a contract does help to provide peace of mind. After all, without this security we may be left helpless when costs begin to creep up.

For business owners the benefits of fixed contracts often outweigh the negatives, as it makes forecasting for the future significantly easier. In fact, many of the finance and procurement teams I have spoken to about their utilities state that having this level of security in place is crucially important to their business.

Unfortunately for these organisations, the truth is that a so-called “fixed contract” can often hide significant fluctuations once you look past the headline figures. Look at the small print of your energy contract and there are a number of charges that may bring unwanted costs to your business.

Non-commodity charges

The Climate Change Levy

There are numerous external charges your business should be aware of within any energy contract, including taxes and levies imposed in relation to the supply of electricity and gas. Among these is the Climate Change Levy, which, as you may be aware, is set to increase for businesses in April 2019.

The Climate Change Levy is designed to incentivise companies to become more energy efficient and reduce carbon emissions related to business activities. And while it makes up a relatively small percentage of an organisation’s overall energy costs, there are changes coming into play in April 2019 that may nevertheless have a significant impact on your bottom line.

From April, the levy on energy will increase by 45% for electricity and 67% for gas. This shouldn’t be a cause for most businesses to panic as CCL will still only account for roughly 2.5% of the overall electricity bill, but this is just one of many charges which could increase on your “fixed contract”.

Delivering energy

Another charge that can change within a contract is the charge for delivering energy to your premises. These are termed the Transmission and Distribution Charges and it pays for National Grid and your local DNO (i.e. Northern Powergrid) to provide the infrastructure to allow electricity to arrive at your home or business. While you may think that this is just part and parcel of the service you pay for via your supplier on a fixed contract basis, many contracts include clauses that enable them to make changes if those costs are increased by National Grid or the DNO. After all, the Supplier doesn’t want any increases to cut into their profit margins!

There are published forecasts for Transmission charges (the cost of getting electricity from the Generator via the National Grid to your local Distribution Network Operator), which we currently expect to increase by around a 30% over the coming years. There are many ‘fixed’ energy contracts out there which only allow a 6% tolerance on Transmission Network Use of System charges. Should they exceed these tolerances, customers risk a supplier revisiting these charges and increasing a business’s bills.

Some suppliers will provide a p/kWh levelisation figure for various charges. If this figure is surpassed then they’ll pass on those additional fees. What does that mean in reality? Well, a recent example I’ve seen had Balancing Use of System, Renewal Obligation and Feed In Tariffs (all charges which are possibly hidden in your unit rate) at a forecasted rate of 2.36p/kWh. Yet there are forecasts showing this rising to 2.852p/kWh in the near future – an additional 0.5p/kWh.

That may not sound like a large number but when we take into account the transmission charges and CCL increases, it’s starting to rack up!

Estimated consumptions may come back to bite you

If you’re on a half-hourly meter, there is always a risk associated with a supplier taking you on as a new customer. They don’t know what your energy consumption is going to be and can only work on best estimates from your previous years usage. If you use too little or too much, the supplier becomes exposed to additional charges for selling the electricity back to the grid or for purchasing additional energy at an increased rate.

But surely the supplier takes on this risk in a fixed contract?

I’m afraid not in all cases. Typically, there is a contract clause, normally termed the volume tolerance clause, that allows them to recover those costs should you not utilise your forecasted energy consumption as expected. The tolerance is typically +/- 10%. Be wary of this clause if you’re unsure how much energy you will use or have plans to substantially reduce/change your energy requirements.

The energy price is vulnerable

One thing that we all fear – both as consumers and suppliers – is a dramatic shift in the wholesale price of energy. Of course, we feel the change most keenly at the petrol pumps where we can see changes on a regular basis in bright lights. Whether it is political uncertainty, a breakdown in infrastructure or an accident such as an oil spillage, there are many factors that can influence energy costs.

Again, you would expect that as a fixed contract customer your supplier has weighed up this risk and calculated your business or domestic energy prices accordingly. But the truth is that some suppliers still include contract clauses that enable them to change the Contract Price if the wholesale price goes up by a certain percentage – usually 25%. But is it likely to happen?

Over the course of a contract with your energy supplier it is unlikely to see such a huge increase in a short period. However, with such uncertainty in the world currently it is important that both businesses and households are aware that price changes are possible.

So fixed doesn’t always mean fixed. What should I do?

It may sound like obvious advice but it is always important to review the terms and conditions of your utility contracts in detail. Fixed contracts can hide some nasty surprises. A possible option is to opt instead for a Pass-through contract if you’re a half-hourly metered customer, which breaks down all of the non-commodity charges and helps businesses to understand precisely what can and cannot change during the lifetime of a contract.

But it is worth pointing out that just because there are clauses mentioned in your contract doesn’t mean the supplier will automatically enforce them. And with the help of an energy consultant you can work with suppliers to get a wholly transparent deal that offers you genuine security.

If you want to ensure that unforeseen energy costs don’t creep up on you and upset your financial forecasts, the team here at The Energy Check can help you every step of the way. As I have often said, it isn’t always about switching from tariff to tariff – often it is about understanding how you are being charged for your energy and what can be done to manage costs and consumption in both the short and long term.

Get in touch with the team here.

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