Posts Tagged ‘business energy’

New research has found that as many as 1 in 5 business energy invoices could contain errors costing around £500 million a year.

The most common mistakes are incorrect meter readings and the wrong unit rates being applied, while other mistakes can include duplicate charging, for instance on available capacity, incorrect VAT rates (particularly for schools) or wrong standing charges.

Retail and leisure businesses with complex and changing portfolios, often without automatic meter readers, are subject to the most overcharging.

Most business don’t conduct detailed energy invoice validation, yet common errors could be costing thousands.

The best means of ensuring you haven’t overpaid in the past is to conduct an historic audit, while ongoing validation is important to ensure that mistakes are spotted and rectified as soon as possible.

 

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The US Energy Information Administration (EIA) forecast in December that the 2017 oil price would average US$52, similar to current levels though double that of a year ago.

However, Forbes analysis recently found that past EIA forecasts varied from actual prices by 30-35%, and with other expert forecasts also not faring too well, predicting the future price of oil, gas and electricity is a pretty thankless task.

The variety and complexity of factors influencing energy prices mean it is increasingly difficult to provide confident price predictions, from the geo-politics of the Middle East, Opec and Russia to Brexit and Trump, the expansion of renewable energy and supply- and demand-side technological developments such as fracking, battery storage and energy efficiency.

While oil and gas prices may experience see relatively stable 2017, UK electricity prices are all but certain to see an increase:

  • The wholesale electricity element now accounts for less than 50% of your bill, so even if the commodity markets fall prices could still increase on the back of rising non-energy charges
  • These non-energy costs – transportation, distribution, government charges, taxes etc – will increase over the next few years, resulting in higher costs for all

What to do?

  • Understand your risk: what is the impact on your business if prices increase by 5, 10, 15% a year over the next few years?
  • Manage that risk: test the market early, don’t wait until near your renewal time when you could be hit by a price spike – contract when the market is in your favour
  • Focus on efficiency: cut costs and reduce exposure to volatile markets by using less

To no great surprise Ofgem announced that it had abandoned attempts to introduce a code of conduct for energy brokers/consultants, despite several years, numerous consultations and innumerable workshops.

The code was intended to be a set of standards that set a benchmark for high quality consultants acting as intermediaries between non-domestic energy users and suppliers, protecting businesses from unprofessional and misleading tactics. Initial plans from Ofgem indicating that suppliers would only be able to work with consultants who had signed up to the code of practice have now been scrapped.

Ofgem reported that they found inconclusive evidence of consultant malpractice, so has postponed further work on the code and instead said that consultants should take on voluntary principles to treat businesses fairly.

Things to be aware of when working with a consultant…

  • some consultants may represent a single or small group of suppliers rather than the whole market
  • you’re not obliged to accept an offer from a consultant: ensure you understand their services, fees and T&Cs before accepting
  • make sure you’re comparing like-for-like: supplier and consultant 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

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 consultants, they 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.

The Competition and Markets Authority (CMA) recently proposed a number of measures designed to increase competition and reduce energy costs for small businesses, including…

  • ending automatic rollover contracts
  • enabling rival suppliers and energy brokers to access customer details so they can target them with cheaper energy offers
  • moving all small businesses to half-hourly settlements
  • requiring suppliers to publish all tariffs on their website to increase transparency

According to the CMA suppliers make twice the margin on small business customers than they do in the domestic market, and four times the margin compared to larger industrial customers.

It also found that small firms were paying around one-third more on rollover contracts for electricity and about 25% more for gas. Those on out-of-contract or deemed rates are paying at least two-thirds more for both electricity and gas than those on contracted rates.

Half-hourly settlement would improve invoicing accuracy and mean businesses could pay less by using energy outside peak times, although those who have no choice but to use power in the expensive morning and evening peak periods may end up paying more.

It’s not clear if or when the CMA’s proposals will be implemented, but it’s likely that half-hourly settlements will be introduced at some point by Ofgem (already underway for some customers), while pressure on suppliers to improve customer service, transparency and pricing from the CMA, Ofgem and others is set to continue.

 

Even before the Brexit vote on 23 June the energy markets had experienced a couple of months of steady increases after a lengthy period of stability. Between April and the referendum wholesale market rises equated to increases of approximately 25% in the cost of gas and 18% in the cost of electricity.

The immediate aftermath of the leave vote saw suppliers pull prices in the midst of currency falls and general surprise and uncertainty. This short-term volatility could well continue, although in the longer-term underlying factors such as the price of oil, new generation capacity, policy changes and investor confidence are likely to be the main drivers.

Energy prices

The fall in the value of the pound will inevitably result in more expensive imports (on which the UK is increasingly reliant).

How long this will last is very difficult to predict, though fears over the UK and European economies could also lead to a weakening of oil prices, stalling their recent rises and negating some of these exchange rate costs.

Energy investment

Of concern is also the impact Brexit will have on the much needed investment in the UK’s energy infrastructure – around £19 billion a year is required until 2020, much of which is expected to come from foreign sources to fund new nuclear, offshore wind and gas power stations.

Until there’s clarity on new trade agreements this investment would well be put on hold, threatening security of supply and carbon reduction targets, which in turn could push up prices.

In particular, the future of the Hinkley nuclear power plant in development by EDF with Chinese backing remains uncertain: will the French Government facing their own economic and political challenges really back a massive and possibly risky investment in a non-EU British project?

In the absence of a new Prime Minister and clarity on a timetable for Brexit – let alone what that actually means – energy prices are likely to continue their recent upward trend, based on an unhealthy mix of uncertainty and volatility.

 

 

After a lengthy period of declining energy markets the last couple of weeks have seen wholesale electricity prices spike to around £40 p/MWH compared to January lows of £33.

A mix of Sterling falling against the US dollar and Euro on the back of Brexit uncertainties has pushed up the cost of energy imports, rising oil prices (nearing $48 p/barrel against lows of $27), along with the recent cold snap increasing demand, have created a volatility not seen for some time.

In the longer-term the expectation is that the market will remain suppressed, but the current volatility highlights the importance of monitoring the market well in advance of renewing your energy contracts – buying at the wrong time could turn out to be an expensive mistake.

It’s therefore important not to wait until you receive your supplier renewal letter: prices fluctuate, so implementing a long-term strategy ensures you’re buying when the wholesale energy market is in your favour, not just when your contract terminates.

 

 

 

The long-awaited report from the Competition and Markets Authority (CMA) into the UK energy market has found that the big six energy companies have made excess profits on supplies to SME customers of around £280 million a year.

This equates to a roughly 6% premium on gas and electricity than in a better functioning market according to the CMA.

Of the £280 million a year around £230 million is estimated to be related to micro-businesses i.e. those organisations using less than 293,000 kWh of gas or 100,000 kWh of electricity a year, or with fewer than 10 employees and an annual turnover total not exceeding 2 million euros.

In an effort to improve the market the CMA proposed a number of long-needed measures focused mainly around price transparency:

  • suppliers should be required to disclose all available prices to micro-business customers
  • out-of-contract rates and deemed contract prices should be disclosed on supplier websites
  • auto-rollover contracts should not be permitted
  • micro-businesses should have longer notice periods with no termination fees

 

Greater transparency and contract flexibility should certainly level the playing field for smaller business energy users, though it will remain important that these businesses shop around and don’t just accept their current supplier’s renewal offer.

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.

The Government’s ‘reset’ of energy policy this week spelt good news for the builders of gas-fired and nuclear power stations, along with shale gas producers, but not such good news for renewable generation or coal, with all coal-fired power stations closed by 2025.

The already-announced reduction in subsidies for photo-voltaic and onshore wind power were accompanied by a warning to the offshore wind industry to lower costs or also see the end of subsidies. The French and Chinese operators of the planned new nuclear plants, on the other hand, will benefit from a guaranteed £92.50 p/MWH when they come on stream, more than double the current wholesale market price (£39 p/MWH).

Although the importance of energy efficiency was highlighted, there were disappointingly no new measures to support businesses and consumers in implementing efficiency measures, which is surely easier than building more stations.

 

 

 

Leaving energy contract renewals until the last minute is all too easy but could leave you paying unnecessarily high prices. By starting the process at least 6 months in advance, preferably sooner, you’ll reduce exposure to the volatility of wholesale energy markets and ensure you’re in the right contract for your organisation.

  • comparing prices can be difficult: don’t rely on comparing unit rates as the best way to evaluate competing offers – different suppliers handle non-energy costs (green taxes, distribution charges etc) differently, with some including them in the unit rate where others don’t. Ensure you’re comparing like-for-like as making a decision based on the wrong data could prove costly.
  • plan ahead: volatile wholesale energy markets offer both an opportunity and threat – timing your renewal for when the market is low could generate savings, but get it wrong and you could pay a premium. Track the market (or work with a consultant who does this for you) to buy when the market is in your favour.
  • don’t wait until September: most commercial energy contracts renew in Sept/Oct, which means suppliers are at their busiest and can sometime pick-and-choose who they work with, meaning prices may push up. Avoid the Autumn rush and give yourself time to identify the most suitable offer for your organisation.
  • support budgeting: rather than add a % cost to next year’s utility costs, request a renewal quote from your supplier at budget time – even if you don’t sign a new contract at that point you’ll gain useful market intelligence that informs next year’s financial planning
  • contract complexities: suppliers are coming up with new and innovative products – flexible, market trackers, baskets, risk managed – alongside the traditional fixed contracts, which offer opportunities but which can also be difficult to decipher. Ignoring these options could be a missed opportunity however, and while time is needed to ensure you’re selecting the right contract-type for your business, you could be missing out by staying with your usual fixed contract.
  • never go out of contract: out-of-contract rates and automatic renewals are very, very rarely the best option, and are often up to double standard rates so make sure you renew in plenty of time
  • energy efficiency success could impact your supply contract: if you’ve succeeded in reducing consumption it’s worth making sure that your new supply contract takes this into account so you avoid take-or-pay penalties.