Archive for March, 2015

Ofgem has released a new guide on working with third party intermediaries (TPI) who help companies procure and manage energy. While the document is aimed primarily at micro-businesses, the principles outlined are equally applicable to larger organisations.

Reasons to work with an energy consultant…

  • business energy rates are rarely published and are usually bespoke to each company, making it harder to obtain and compare prices
  • suppliers are under no obligation to supply you – factors including size of supply and credit rating may mean they decline to offer a contract
  • understanding your contracting terms is important as there is usually no cooling-off period
  • contracts may last several years with early termination fees

A good consultant will help address these issues, ensuring your energy contracts meet your specific needs, both operational and financial.

Things to be aware of when working with a consultant…

  • some consultants may only represent a single or small group of suppliers rather than the whole market
  • they may not find the best deal – if you research different suppliers, contract lengths and payment methods better prices may be available
  • you’re not obliged to accept an offer from a TPI – ensure you understand their services, fees and T&Cs before accepting
  • supplier and TPI price offers may not be presented in the same way, some charges may be pass-though and therefore vary during the contract lifetime, while others are fixed; make sure you’re comparing like-for-like

Questions for your consultant…

  • how many suppliers will be approached for prices?
  • what will you do to help switch supplier?
  • what other services are included during the life of the contract?
  • how do you charge for your services – a direct fee or an indirect commission?

Although Ofgem doesn’t licence TPIs, consultants must comply with consumer protection legislation such as the Business Protection from Misleading Marketing Regulations (BPMMRs) – and since November 2013 Ofgem has the power to apply to the courts for an injunction to prevent breaches of the BPMMRs.

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According to the latest predictions from Smartest Energy, non-energy charges will account for 57% of electricity costs by October 2015 compared to 47% in October 2014.

There are several main drivers for this changeElectricity cost breakdown:

The impact on business customers is that the variable element of your energy costs – the electricity that comes through the wires – is having a decreasing influence on the overall price you pay. In practice this means that while wholesale energy markets are unusually low, prices have not fallen to the same extent.

Examples of how some of these charges are increasing include:

  • Feed-in-Tariff: forecast to increase to £4.51 p/MWH in 2016/17 from £2.54 in 2013/14
  • Renewables Obligation: forecast to hit £13.43 in 2016/17 from £10.565 in 2013/14

One of the key developments over the next few year is also the introduction of Contracts for Difference (CfD), a new government scheme under which low carbon generation is guaranteed a minimum purchase price in order to stimulate investment.

CfD costs will be low during 2015/16 as CfD generation begins output later in the year, with full year average costs expected to be in the region of £0.41 p/MWH, but will increase steadily to around £3.12 p/MWH in 2016/17 and £6.02 in 2017/18.

These developments mean that the price you pay for electricity is no longer as closely linked to trends in the wholesale energy market as before, which in turn means that the primary route to paying less is cutting consumption.

Government plans to improve the energy efficiency of commercial rented property could have significant implications for the commercial property market.

The proposal put before Parliament under the provisions of the 2011 Energy Act would apply to new leases or lease renewals from April 2018, and for all rented property from April 2023.

The key measure is that the minimum energy efficiency standard will be an EPC rating of ‘E’, with properties required to meet at least this threshold before landlords are able to let the space.

According to existing EPC rating data, around 18% of leased properties currently have ‘F’ or ‘G’ ratings and 20% ‘E’. With EPC efficiency standards expected to tighten in the long-term, it’s possible that properties currently rated ‘E’ may be caught by the new measures.

Implications

If the new efficiency standards are not met it’s possible that some properties may become un-letable after 2018, or that rents – and asset values – will be under heavy pressure.

Acting early by identifying which properties are rated ‘F’ or ‘G’ means that there’s time to assess your options and incorporate the implementation of energy efficiency measures into your asset management plan.

Landlords will need to weigh the costs of upgrades against those of doing nothing, which could see reduced rents and asset values. Alternatively, selecting the right efficiency measures should improve asset values while making properties more attractive to tenants.

First steps

Using the results of the current EPC advisory report, or ideally a comprehensive energy audit, the first step should be to identify at-risk properties and rank the recommended energy efficiency measures by effectiveness, cost and payback period.

For instance, lighting upgrades usually have 2-3 year payback periods and are relatively straightforward to implement, and may shift a property rating up one score, while larger investment in windows and insulation will have a longer payback but make the property easier to rent and future-proof against future efficiency regulations.

Other considerations include:

  • how will the landlord work with tenants to implement the efficiency works?
  • are any of the costs re-chargeable under the terms of the lease?
  • or will the landlord recover costs through an uplift in the service charge?

While tenants may baulk at the prospect of contributing to efficiency improvements, they will benefit in terms of reduced operating costs and an improved working environment. In these situations a thoroughly assessed and costed efficiency proposal will be vital to selling the benefits to tenants (current and future).

Cost or benefit?

While there will undoubtedly be a cost to improving a building’s EPC rating it’s important to take the longer-term view that upgrading a facility protects, if not enhances, its value, while also making it more attractive to tenants increasingly conscious of operating and service charge costs.

Exceptions

There are a number of exceptions to the regulations for properties falling below the ‘E’ rating, including:

  • lease term for less than 6 months or more than 99 years
  • required measures are not cost-effective either with a 7-year payback or under the commercial Green Deal ‘golden rule’ which states that energy savings made in a 25-year period must be equal to or more than the cost of implementing those savings
  • despite reasonable attempts, the landlord is unable to obtain the consents needed to conduct the work (eg from tenants, lenders, listed status restrictions)
  • the energy savings measures would decrease the value of the property by 5% or more or that wall insulation would damage the property

The Department of Energy and Climate Change (DECC) will operate a register of landlord notifications to seek an exemption, which will also be available to local authorities, who in turn will have responsible for enforcing the regulations.