10 Energy Contract Pitfalls That Could Be Costing Your Business Money

Energy supply contracts have become increasingly complex, the result of sustainability and infrastructure investment incentives being funded via consumer’s energy bills. This is particularly true for electricity supplies. Add into to the mix the huge range of products available and supplier nuances and it is no wonder then that unsuspecting customers can be tripped up.

Here are 10 common contract pitfalls to bear in mind to help make sure that bargain energy contract is as good as it looks:

1. Automatic Renewal

Many business energy supply contracts require notification to be sent to prevent automatic contract renewal. If this is not done you could find your business trapped with unattractive rates with very little or no room for negotiation!

Check your terms and conditions and welcome letter. The amount of notice you are required to give varies from supplier to supplier in addition some specify notices be sent to a specific department to be valid. Do this before spending lots of time on lengthy negotiations – agreeing a contract elsewhere that you are unable to start due to automatic renewal can be very expensive.

2. Data, Data, Data

Check your consumption data thoroughly – don’t assume the consumption on your renewal quote is correct. Mistakes can be made easily enough but in addition your current supplier will not know about any planned changes you may have.

Having a good forecast of your energy usage is key to comparing suppliers’ offers accurately. In addition you can open up your business to significant penalty charges for using too much or too little energy…

3. Consumption Variation Penalties / Take or Pay

Do you know what would happen if you consume more or less energy than quoted on your supply contract? Do you know what threshold is allowed? Are you tracking it currently?

Many contracts have provision for additional costs if you use more or less energy than you agreed to and this can be buried in the fine print of their terms and conditions. The most punitive of these are effectively a promise to pay for the minimum consumption irrespective of the actual energy used (Take or Pay). Other similar penalties are linked to wholesale prices, effectively charging for any losses incurred by the supplier to sell the energy back to the wholesale market.

This is particularly important if the future of a site or production is uncertain as it can result in significant unexpected charges. Good job you’ve already checked your consumption forecast!

4. Fully Inclusive

There are a host of additional charges from 3rd parties that suppliers are required to collect from their business customers. Many suppliers offer inclusive contracts consolidating some of these into their unit rates. Not all are fully inclusive however with some excluding the more volatile sustainability charges, others separating metering and data collection charges. This is not always obvious but it is important to check as combined 3rd party charges can easily make up 50% of the total cost of your bill!

5. 3rd Party Pass Through

Does your contract allow the supplier to pass on changes to any of their 3rd party costs? If so they could be looking artificially cheap as almost all 3rd party charges increase annually. Don’t confuse a fully inclusive contract (everything simplified into the unit rates) with a fully fixed contract (prices won’t change mid-contract) – suppliers can still pass these on unless your contract is fully fixed.

6. Climate Change Levy (CCL)

CCL like VAT is excluded from the contract rates so remember to factor it in when estimating your costs. This is important as it can make up to 10% of the total cost of your energy bill which can seriously hurt your budget! Also remember CCL changes April every year and is always passed through even if the rest of your contract is fully fixed.

If you are exempt from CCL (eg. Charity) or have CCLA’s remember to submit your forms straight away so your account is set up correctly from the start.

7. Broker Commission

Are you using a broker? If so how much are they adding to the cost of your bills? Commission on bespoke priced commercial energy contracts is added on top of the supplier’s base contract rates. An unscrupulous broker can easily set excessive commission rates which are not clear in either the contract or the bills.

Make sure you have a fixed commission rate agreed with your broker up front and verify that the correct rate has been used with your supplier. If they are unwilling to do this – buyer beware! Brokers can add potentially huge commission and even modest sounding kWh commission can rack up massive costs on larger supplies. Alternatively ask your broker to go commission free and work on a direct fee basis.

8. Additional charges

Some suppliers levy additional charges for non-direct debit payment terms even if the quote contract states a non-direct debit payment method. Some of the largest we have is a flat £25/bill (£300/year) or 5% rate uplift.

9. Invoices

If you have a portfolio with a large numbers of non-half hourly electricity or small gas supplies billing can be a big factor. Some suppliers offer quarterly invoicing instead of monthly, a difference of 8 fewer bills per month per supply. You only need 12 supplies before you save a whole day of administration time (assuming 5 minutes per bill)!

Alternatively group billing could save you significant processing time – condensing a group to just a single monthly invoice.

10. Customer Service

You have found the cheapest deal – but are you locking yourself into a year of headaches of incorrect bills, unallocated payments and hours of phone calls on hold with your new supplier?

This is tricky to know in advance as many customers usually only have experience of a couple of suppliers at any given time and individual suppliers performance can quickly change. The situation is further muddled as each supplier often has separate teams for different types of supply and business size.

Do some research online on supplier performance levels but be sure to check any feedback is for the correct department (often I&C or SME). Alternatively use a broker that also provides account management/bill checking service and works with a range of suppliers – they will have first-hand experience of supplier’s pros & cons.

Automatic Renewal…

So you have just agreed your new, perfect supply contract and have dodged some costly and time consuming pitfalls! Don’t forget step 1 – if your contract allows it, send your notice to prevent automatic renewal now. Just remember to save a copy of your acknowledgement!

Disclaimer: The information contained in this article is based upon our own experiences and observations providing energy management, energy procurement, bill checking and dispute resolution services for business customers. It is not intended to cover every contract situation, energy supplier or customer type and it is a customer’s own responsibility to fully understand any contract they are entering into and to seek professional assistance where required.

Steve Clifford, CEng, MIMechE, MEI, MCIBSE

Owner of Utility Management Consultants , Clifford Talbot Partnership | Website

Steve Clifford is Owner of Clifford Talbot Partnership which was formed in 1984 to provide solutions to energy and utility management issues in commerce, industry, government and the public sectors throughout the UK.