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Business Guide to Fixed Energy Deals

Are fixed energy deals really fixed?

If there were an award for the ultimate “yes, but..” question then this would surely win it.

Frustratingly in energy contracting ‘Fixed’ does not always mean fixed all of the time.

Whilst we cannot change this peculiarity of the market we can help your business understand exactly what to expect from any energy contract you are entering into.

Before we get to the ‘fixed’ nature of deals however we need to consider a wider question:

The energy price is made up of the following constituent parts:

  1. The cost of energy
    the cost of the raw energy commodity;
  2. Third party charges
    Third party charges are those elements of the energy price that the supplier doesn’t control.
    • the cost of the transportation network (distribution and transmission);
    • the cost of transportation of the energy along the network;
    • the cost of losses as the energy is transported through the pipes or wires;
    • the cost of installing, maintaining and reading the meter;
      In other words they are the elements that the supplier is charged by a third party for services delivered to them in order for them to deliver their service to you.
  3. Supplier costs
    • the cost of suppliers’ servicing and marketing to the customer;
    • the cost of the suppliers’ margin;
  4. Levies
    • the cost of universal government levies such as CCL;
    • the cost of various electricity supply levies such as HDCL, FIT, RO and CFD;
  5. Taxes
    • the cost of VAT at the prevailing rate;

We can safely say that all fixed energy deals include the following costs as a matter of course:

  • the cost of energy
  • third party charges
  • supplier costs

However some suppliers choose to exclude some or all of the following:

  • the cost of various electricity supply levies such as HDCL, FIT, RO and CFD;

And all will as a matter of course exclude:

  • the cost of universal government levies such as CCL;
  • the cost of VAT at the prevailing rate;

This can prove confusing; indeed the old phrase “not comparing apples with apples” is very relevant here.

An attractive headline price could appear cheapest of all yet it could exclude some costs meaning that a ‘more’ expensive but fully inclusive deal provides a better price!

This is where we can help, letting you know exactly what is included and what isn’t and ensuring that the deal you are signing up to is the deal that you think you are.

  1. Fully fixing all elements including:
    • Energy
    • Third party charges
    • Supplier costs
    • Levies
  2. Fixing all elements including one or more of the government levies
    • Energy
    • Third party charges
    • Supplier costs
    • Some Levies
  3. Fixing all elements bar government levies
    • Energy
    • Third party charges
    • Supplier costs
  4. Fixing energy costs and third party charges:
    • Energy
    • Third party charges
  5. Fixing just the energy cost:
    • Energy
  6. Fixing no elements of the price
    • Including a freedom of movement clause on price change

Because of the way the business energy market is set up, suppliers are not in control of all elements of the final energy price.

These charges are established by government (levies, taxes) and by third party organisations (metering services, transportation). These charges change annually and at times more often.

As a result suppliers rely on an estimation of these costs in order to determine the price they offer to customers. As some contracts are priced for periods of anything up to 5 years multiple changes must be estimated accurately in order to best ensure that the supplier can recover likely costs.

Some suppliers are happy to fix their costs at this estimation level and as a result offer a fixed price with no scope for change. These suppliers may have built in an additional cost buffer or may have full confidence in their prediction and are happy to offer a deal without such a premium.

Other suppliers prefer to err on the side of caution and whilst they include these estimations in their price they also reserve the right to pass through any changes of sufficient materiality. This may result in these suppliers offering a keener price but with the option to amend the amount you pay should commercial circumstances require.

Ultimately it will depend on a supplier’s commercial decisions as to whether a price change is enacted.

Clearly those suppliers, such as British Gas Business, E.ON and Corona Energy who do not allow any ‘pass through’ will not be able to invoke a price change based on a commercial decision.

For all other suppliers however there is scope to make changes although such changes are rare, and in most instances where they are material enough, should allow the customer to break their contract.

  1. Energy
    Unless the contract specifically states that the energy price is readily variable the likelihood of this, the biggest cost element, and therefore the most material sum, changing is relatively low.

    If this element were to change customers should be able to break their contract if they were unhappy with the offered price.

  2. Transportation & Metering
    These costs vary considerably region by region, meter by meter and year by year. Particularly in the gas industry it can be a problem for forecasters. Indeed it is here that a ‘pass through’ of a cost is most likely. Because any ‘cost’ here is universal i.e. any supplier supplying it would be charged the same, it is less likely that a change would trigger a break clause in the contract. That said the incidences of price changes for transportation and metering costs are increasingly rare.
  3. FIT, RO and CFD

    By their very nature these costs are hard to pin down, indeed they tend to be based on estimates of estimates. As a result this is the area of charging that is most susceptible to a pass through of costs. As the table above showed us, these are also the elements that are most likely to not be included at all in some suppliers prices.

    Happily these costs are relatively small, although not insignificant elements of the energy price. As such a pass through will be less impactful than a revision of energy, transportation or metering costs but it still has the capacity to significantly alter the competitiveness of a contract once all costs are included.

A price that is not ‘fully’ fixed is not necessarily bad.

It certainly isn’t necessarily the case that the supplier is trying to ‘hoodwink’ you.

Rather it is the case that the supplier is offering their best terms whilst also covering themselves for unforeseeable eventualities. In most instances these clauses will never be invoked so the price you sign up to is the price you will most likely pay. However there is the capacity there to make a change, however unlikely that may be.

That said what should not be forgotten is that some suppliers do not even include an estimate of some costs, particularly levies, in their offer price. In this situation it is guaranteed that the price you will pay will be higher than the offer price. This is unavoidable, as all suppliers must collect the levies in full. The key here is to be aware of what is included and what is not and to ensure you are comparing “apples with apples”.

The market would be significantly easier to navigate if all costs were included and fixed, however if this was the case the opportunity for striking a great deal (accepting some risk of a price increase) would disappear.

On balance then, as long as you know what is included, and budget for anything missing, in our experience it is more the existence of a contract clause rather than a commercial imperative that marks the difference between a fully and partially fixed business energy contract.