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Energy – maybe not a sexy subject, but usually a large cost and the industry is full of sharks and “used car sales” tactics (apologies to any of the good used car sales people).

Do you want to roll the dice? Or would you rather go in eyes open? This email busts a couple of myths so you can go in informed at your next energy renewal.

There are 2 myths I want to bust, perpetuated by the press, and by energy brokers:

  1. That energy costs are always rising.
    Guess what, they’re NOT.
  2. That consolidating supplies to one single large contract and single end date is beneficial.
    Sneak preview: it’s NOT.

Myth 1: Rising Energy Costs – False

Ignoring the impact on the markets and oil price of the Corona Crisis where we all know oil, and hence energy prices to some extent, have reached long term lows. However before that Energy prices are always cited as a concern by Business Owners and is of such concern it’s a perpetual question in the IoD’s regular Policy Voice questionnaire.

Look where we are now – red line right at the bottom.
[Mythbuster bonus: The graph shows prices are not lower in the summer]

 

Or look at it another way, the sort of graph a broker might show you. Looks like it’s plummeted in the 4 year graph, a broker might show you this to convince you of a 5 year contract (with a big commission built in, longer contracts often have bigger commissions.

But a broker might show you just the 30 day graph, if trying to panic you into buying now, like the one below that makes it looks like energy is “rising as always, so you had better buy now before the quotes go up”

BUT Zoom out and the 10 year picture shows that actually it’s flat-ish (either side of 50p/therm) with big peaks and troughs:

Which brings us to myth 2…

Myth 2: Consolidating Supplies = cheaper prices, lower risk

First you need to understand that the business of an energy broker is a volume game, i.e. slim margins (though I’ve seen massive commissions sometimes) means a call centre approach, where you need to lock in as many customers for as long as possible with as little admin as possible, which increases profit per hour FTE.

The ruse they’ve come up with to enable this is to perpetuate a myth that a single contract end date is for your benefit, because you then have 1 supplier, 1 renewal point, less admin and nothing to worry about for another 1,2,3,5 years and the biggest lie of all in that bulk buying will get you cheaper prices. Unless you have a multi-million pound spend and at multiple sites so you can get into 8 or even 9 figure annual bills there is no bulk buying power at all. Many of the energy companies simply issue a daily price matrix for all supplies under a certain, quite large, size.

RISK, RISK, RISK – it’s all about RISK.

A broker won’t ever tell you that by locking in all your supplies to one end date, you are risking a huge spend on the energy markets whims. Take the 4 year graph above. If you had locked in 10 x £50,000 supplies at June 16 with a September start date for 2 years, you would be looking at renewal approaching the huge spike in September 2018 and your broker would (quite rightly) trying to get you to lock in before prices went even higher (you can’t know it was going to fall). But that means your £500k energy bill has now doubled to £1m. Where are you going to find half a million in your budget to pay for that?

A better way if you have multi-site is to split the contract end dates across seasons and years. So if we had taken over the management in June 16, we would have put some on 1 year, some 2 year and some 3 year contracts and possibly a few 18-month contracts too. That means you are constantly dipping your toe in the market and overall you’ll have an average price for your energy, but never have a sudden change, each year only say 25% will change in price. So your £500k becomes only £625k say.Or look at it another way, the sort of graph a broker might show you. Looks like it’s plummeted in the 4 year graph, a broker might show you this to convince you of a 5 year contract (with a big commission built in, longer contracts often have bigger commissions.


Article by: David Powell

As seen in Issue 5 of The Bottom Line