Archive for the ‘Energy broker’ Category

Energy procurement sounds like it should be a pretty straightforward process, yet there are a number of costly pitfalls that the unwary business can fall into…

1. Don’t wait until you receive your supplier renewal letter: prices fluctuate, so it’s essential to have a long-term strategy that ensures you’re buying when the wholesale energy market is in your favour, not just when your contract terminates.

2. Don’t assume you can get the best price: are you tendering your business to all suppliers, not just the big 6 or your current supplier and a couple of others? With the number of suppliers and complexity of energy products growing all the time, it’s unlikely that most businesses have the time or industry expertise to access the full market and product range, which means you could be missing out on the best product for your business.

3. Don’t forget to monitor your consumption: suppliers price on the basis of predicted demand so its important to understand your energy usage patterns – penalties can be imposed if you use significantly more or less energy than expected (take or pay clauses), so check those T&Cs as well as your consumption. For businesses implementing energy savings programmes it’s also useful to check that your supply capacity is set at the right level – if it isn’t you could be paying for something you’re not using.

4. Don’t just focus on the unit price: a headline unit price might look competitive, but what about the standing charge, and does it exclude charges such as the Feed-in-Tariff and Renewables Obligation, which other suppliers have incorporated into the unit rate? Commercial energy tariffs are complex, made more so by each supplier presenting their prices differently, so it’s crucial to make sure you’re comparing like-for-like.

5. Don’t assume your energy invoices are correct: billing errors are surprisingly common, yet the complexity of energy tariffs can make it difficult to spot, let alone rectify mistakes. Historic audits can uncover past mistakes, while ongoing invoice validation means you’ll only pay what is due.

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Unless you’re tracking the wholesale energy markets daily, understanding the best time to renew an energy contract is extremely difficult – and leaving the renewal process until your current arrangement expires means you could be missing an opportunity for substantial savings.

Energy prices historically are often lower during the summer months, edging higher in the Autumn and Winter, so beginning the renewal process early means you can test the market to assess your options: if they don’t look good or you think the market will fall, then wait a bit and try again.

Just as energy markets can have seasonal variations, the market is also vulnerable to spikes and shocks, anything from volatile relations between Ukraine and Russia, to Euro-zone economic scares and OPEC oil production decisions. Understanding the difference between short-term prices shocks and longer-term trends is therefore vital, something a good energy consultant can advice upon when timing your next contract.

If the market is low, why aren’t my costs?

Despite record lows in the wholesale markets, you may not experience clear savings on your next electricity contract due to the plethora of third-party (or non-energy-charges) which now constitute around 50% of the overall cost of electricity.

These charges include transmission, distribution, taxes such as the Renewable Obligation, Feed-in-Tariff and Climate Change Levy. Two new charges will also add 4-5% to electricity bills by 2020: Contracts for Difference and Capacity Market charges, which are aimed at boosting low-carbon generation.

All inclusive or pass through

Depending on your specific contract terms, third-party charges can be:

  • all-inclusive or fixed so that they’re the same throughout the contract life, meaning you know what you’ll pay. On longer contracts suppliers will include a premium to cover future increases in these costs. These non-energy charges will either be incorporated into your kWh unit rate or itemised separately
  • pass-through: billed to the customer at the rate charged to your supplier, so not included in the unit rate. A pass-through contract avoids the supplier premium of an all-inclusive contract, but means you have the risk of future increases in these charges, along with an element of budget uncertainty.

It’s vital to understand which charges your contract does and does not include, otherwise it’s very hard to compare prices like-for-like, as a seemingly low unit rate may not include third-party charges, resulting in a misleading comparison with all-inclusive rates. Working with a reputable consultant can help avoid these pitfalls.

Ofgem’s long-awaited proposals to regulate energy brokers/consultants came a step closer recently with the release of a draft code of practice, which would require :

  • brokers and consultants to be completely transparent about their fees, the contracts they offer and which suppliers they represent.
  • energy suppliers to only work with brokers who have signed up to the new code

The aim is to protect businesses from misselling and drive up standards in the industry. The strongest enforcement element is the requirement for suppliers to only work with accredited brokers/consultants, which ensures that suppliers and brokers are accountable for delivering a high quality of service.

Since November last year Ofgem has had the power to act against brokers who market their services in a misleading way, but the proposed code would increase the protection for businesses.

What does this mean for you?

With the code not due for implementation until later in the year, there are a few important questions to ask that can help ensure you receive a quality, transparent service:

  • Does the broker cover the entire supplier market, or represent only 1-2 suppliers?
  • How do they get paid? No energy broking service is truly free, so ensure you know whether a commission or fee is included in your contract price – and ensure that the fee is the same regardless of supplier

Reputable consultants and brokers already abide by a code of conduct from either the Association of Cost Management Consultants or Utilities Intermediaries Association.

What does this mean for your broker?

It seems likely that the planned code of conduct and supplier accreditation system will see a reduction in the estimated 1,000 brokers and consultants in the UK.

Suppliers may only accredit brokers who can bring them significant energy volumes in order to maintain quality and minimise administration costs; ensuring that 1,000+brokers are adhering to the code could be expensive, particularly if many only place small energy volumes.

The sector may therefore see a period of consolidation, so it’s worth checking now whether your broker is aware of the draft code of conduct and how they plan to comply.

Although Ofgem has new powers to take action against suppliers and energy brokers who missell energy, there are still a number of measures that businesses should take to ensure they’re making the best decisions about their energy contracts:

  • ensure that your broker covers the entire supplier market, not just the ‘big 6’ or a select few suppliers
  • check that they receive a standard commission % or payment regardless of supplier they recommend, and are therefore completely independent
  • know your contract end date: if you go out of contract you’ll usually be put on to punitive rates until you enter another contract
  • don’t just accept your renewal quote: shop around yourself or with the help of an energy consultant, as there are often savings to be made by switching
  • if using an energy broker/consultant ensure they’re a member of one of the industry bodies (eg Association of Cost Management Consultants or Utilities Intermediaries Association), which have strict codes of conduct

Above all, don’t wait until the few weeks before renewal to look at your energy contract; start reviewing the market at least 6 months in advance so you can minimise the risk of volatile and rising prices.

It’s always easiest to put off unpleasant tasks, which for many includes checking energy contract renewal options and prices.

This creates a number of risks however, most importantly that you’ll have to pay whatever the market decides at that (limited) point in time, or even worse, be forced into penalising out-of-contract rates.

These five simple rules will help ensure you pick the right contract at the right time for your business…

1. When you contract your energy supply is the biggest factor in the price you pay: wholesale energy prices can fluctuate by as much as 50% in a 12-month period – so getting your contract timing wrong can have a nasty impact on your costs

2. The wholesale price of energy is at its lowest level since June 2012, so if your contracts expire in the next 12 months now is definitely a good time to check prices – don’t wait for the market to rise

3. Avoid punitive automatic renewal or out-of-contract rates: if you don’t terminate your existing contract there’s a risk you’ll be rolled-over on to a new 12-month contract at high rates, or even worse, put on out-of-contract rates which can be up to 50% above market prices

4. Make sure you have time to check the T&Cs: they vary between each supplier, e.g. some include charges such as the Feed-in-Tariff which others don’t – so you could be landed with additional costs if you don’t understand the terms of your contracts

5. Put yourself in control: checking prices, comparing offers and understanding contracts all takes time, which you might not have if you wait until the last minute. Starting the process early puts you in charge – you decide what the best contract and best price is for your business

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Make sure you compare energy prices on a like-for-like basis

The growing proportion of energy costs accounted for by government levies has consequences beyond the financial burden, making it increasingly difficult to compare energy prices due to the way in which these charges are presented by suppliers and energy brokers.

When reviewing prices it can be challenging to understand whether costs such as the Renewables Obligation(RO), Feed-in-Tariff (FiT) and Climate Change Levy (CCL) have been included or not.

The risk is that signing up to an apparently cheap contract subsequently lands you with unexpected costs, causing serious problems for many organisations (and the people signing the contract).

Are charges fixed or pass-through?

When reviewing prices it’s important to understand whether the quote includes RO, FiT and CCL charges, or in other words presents a true picture of your total energy costs.

The first question to ask is whether the RO and FiT are included in the contract prices as a fixed cost. If not, they will be passed-through as additional items on your invoice. Whether the RO and FiT are fixed or pass-through, however, they should be included in your energy price quote.

CCL won’t be included as a fixed cost but passed-through, but similarly, it should be included as a cost in any price proposal.

The risk buyers face is that some suppliers (and more often) brokers will exclude one or more of these charges to make their prices look cheaper.

Another ‘trick’ used by some brokers is to base an annual energy cost on unrealistically low consumption, which obviously results in a lower price. When annual prices are presented it’s always worth checking the consumption data to ensure you’re making a true comparison. Ideally this would be from actual automated meter data for the previous 12 months rather than estimates.

5 essential questions to avoid the wrong energy contract

With Ofgem currently reviewing broker practices, and hopefully introducing measures to improve transparency, these kind of practices should become a thing of the past, but the complexity of business energy contracts means a few well directed questions could save a lot of money:

  1. Are Renewable Obligation, Feed-in-Tariff and Climate Change Levy charges included in the price quotation?
  2. Are RO and FiT costs fixed or pass-through?
  3. What unit rates were used to calculate the RO, FiT and CCL costs?
  4. What consumption figure was used to calculate the annual energy cost?
  5. How was the annual consumption figure arrived at?

Ensuring that you compare energy prices on a like-for-like basis can be tricky, but ensures you’re making the right decision for your business.

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Ofgem announced last week that it has been granted new powers to crack down on rogue energy brokers who missell energy to businesses.

Under the Business Protection from Misleading Marketing Regulations, Ofgem can now take action against misleading marketing and advertising. The new powers follow a survey that found around one-third of small businesses did not believe brokers had been upfront about the costs of their services.

According to an Ofgem spokesman, “Getting help from a broker can assist in keeping bills down, but business consumers need to feel confident that they know – and get – what they’re paying their broker for”.

Ofgem also expects to release a new energy broker code of conduct for consultation in December, setting out how they should behave in a fair and transparent way in order to improve business confidence.

The code is likely to be based upon existing voluntary codes from the Association of Cost Management Consultants and Utilities Intermediaries Association), which regulate the practices and encourage transparency among their members.

Questions for your energy broker

In the meantime, a few key questions can quickly determine the transparency and competence of your current or prospective energy broker:

  • Are they fully independent of all suppliers, or do they represent an individual supplier or only part of the market?
  • How do they make money? No energy broker/switching service is truly free, all brokers, consultants or switching websites receive payment of some kind, usually a supplier-paid commission or fixed fee so make sure you know how you’re being charged.
  • Are they an energy expert, or do they also provide for instance telecoms or insurance services? If so, do they have the technical energy market expertise needed to advise on the correct time to go to market, avoiding energy market price spikes, and understand the increasingly complex fixed and flexible products now available?
  • What other services and value do they provide? eg invoice validation, consumption monitoring, energy efficiency advice

Ofgem recently launched a consultation on the potential regulation of UK energy brokers, or Third Party Intermediaries (TPI).

Acknowledging that brokers and consultants play an important role in “empower[ing] customers to make better choices”, Ofgem also predicted that their “importance is likely to grow with the introduction of smart meters and grids, and in increased focus on energy efficiency”.

There are concerns, however, about the practices of a small number of TPIs who operate in a way that is not transparent or fair, which has prompted the consultation. At the moment brokers are not subject to direct regulation (other than standard consumer protection rules), so Ofgem is exploring options including:

  • maintaining the status quo / issuing non-binding guidance
  • introducing a voluntary code of practice that either sets out objectives but has no or minimal oversight, or has strict accreditation, audit and sanctions process; probably based on existing codes of practice
  • governance via suppliers, requiring suppliers to only work with TPIs accredited to a robust code of practice
  • direct regulation of TPIs by Ofgem

The next step is the development of policy options, which will then be consulted upon again, so there’s unlikely to be any change in the near term. In the meantime there are a number of steps all businesses can take to ensure they’re making the best decisions about their energy contracts:

  • know your contract end date: if you become out of contract you will usually be put on to punitive rates until you enter another contract
  • don’t just accept your renewal quote: shop around yourself or with the help of an energy consultant, as there are often savings to be made by switching
  • if using an energy broker/consultant ensure they’re a member of an industry body (eg Association of Cost Management Consultants or Utilities Intermediaries Association), which have strict codes of conduct
  • check that your broker covers the entire supplier market, not just the ‘big 6′
  • check that they receive a standard % commission or payment regardless of supplier

Above all, don’t wait until the few weeks before renewal to look at your energy contract; start reviewing the market at least 6 months in advance so you can minimise the risk of volatile and rising prices.