“Energy prices are rising – lock in now before they rise further”
“Energy prices are falling – lock in now before they rise again”
Sound familiar? These are two great “buy now” sales tools any broker will use to pressure you into locking in the contract no matter what the energy market is doing.
You’ll often see brokers peddling the sales pitch that locking all your energy supplies (Gas and Electric) into 1 contract end date, 1, 2 or 3 years (usually 3) years hence is a good thing because, according to them, it gives you ‘Buying Power’ – this is stuff and nonsense, you need energy spends in the millions to make a tangible buying difference. There are three main reasons to lump all your supplies into 1 contract end date:
- To reduce the admin time it takes to lock in a new energy contract
- To reduce the workload for the energy broker
- To lock in the energy brokers’ income for longer with the minimum effort
As you can see points 2 & 3 benefit the broker not you the customer. Imagine you’ve got 10 supplies and 10 contract end dates, that’s a lot of admin for you, but also the broker has to go to market 10 times, has to convince you 10 times that they have the best price on the day; 10 times they have to potentially go head to head with another broker or you ringing a supplier to check prices. With just 1 end date 3 years or so away the broker knows their income for 3 years and doesn’t have to do anything at all on your account until the renewal comes around.
For you, the energy user, this strategy is a massive risk. I don’t have a crystal ball; the energy companies don’t have a crystal ball and neither does your broker. I couldn’t tell you what energy prices will be doing in 3 years’ time, they might be higher they might be lower. Energy prices are so globally interlinked with many market forces that nuclear accidents like Fukushima, Trumps trade war, gas pipeline accidents in the North Sea, Russian pipeline cut off’s etc can affect prices. The only certainty is that in 3 years’ time, you’ll be renewing all your energy supplies at one single point.
If the market has spiked suddenly (like it did in 2008 doubling in 6 months) you’ll be forced to lock in all your energy supplies at or near a market peak. So, your energy bill might double from £1m to £2m. Could your business suddenly find an extra £1m with say 3 months’ notice of renewal?
There is another way. If you have multiple supplies, there is a balance between admin and contract risk. Let’s say you have 10 supplies of varying sizes. The tiniest you might lock in for 5 years to save admin. The largest you want to spread well apart in terms of the end date, so say 1 on a 3 year, 1 on a 2 year and 1 on 18 months to adjust for seasonality too. The remaining supplies you can judge the contract length that feels right depending on how the market is doing at the time as well as trying to balance contract admin with risk. So, you might end up with 3 to 5 contract end points across your 10 supplies.
Article by: David Powell
This is an article from: Insight & Innovation: Issue 1 – click here to read the whole newsletter.