In the last few years several energy brokers have sprung up to help businesses reduce the cost of their utilities, but do they always offer a good deal?
The media has reported on numerous cases where electricity and gas contracts have been tied to totally inappropriate terms and structures, for extended periods, with no protection from increases in market rates and pass-through charges. They have also revealed highly inflated rates that conceal a potentially unethical level of commission for the brokers.
Whilst this behaviour is not true of all energy brokerages, the marketplace is (currently) unregulated with no transparency on commission, which is why it is important that businesses are highly diligent when approached by a broker.
Before agreeing to a broker’s recommendations, businesses should consider the following:
- Read the letter of authority very carefully and ensure that you are not providing exclusivity or full management rights to the broker. You should also ensure that the letter of authority has a clear expiry date that you are comfortable with.
- Just because you have used the broker for several years and believe they are doing a good job – never take this at face value, as they can exploit your complacency. Analyse the year-on-year impact of their quote and look at it in the context of market movements.
- Energy costs on a long-term contract of two to five years represent a commitment to a significant amount of spending. We would always recommend that only a representative from the Board of Directors or Trustees have the authorisation to approve energy contracts.
- Brokers will often pop-up just before a contract renewal and this is poor practice. For high-consuming accounts, we would expect an energy account to be tendered from up to six months in advance, and if the results are not favourable then the tender should be repeated over and over again to achieve the best results. The reality is that you need 28 days to port a gas contract to a new supplier and 14 days to port an electricity supply, so you don’t need to make a formal decision until very late on in the process.
- Nobody has a crystal ball. Analysts are positioned to provide forecasts on energy pricing, but ultimately we would apply very simple logic to selecting an appropriate term. If the new deal fails to show a monetary saving, then we would not commit for more than 12 months. If the new deal showed a saving, then we would consider a 24-month deal, or a 36-month deal, at the very most, if there were a significant saving and business case.
- When assessing an energy quote ensure that you look at the combined unit rate per kilowatt hour inclusive of the energy costs, standing charges and levies. Sometimes a headline rate can appear low, however it is often offset by extortionate standing charges or levies that have been omitted from the proposal. You need to ensure that you are assessing and comparing energy prices on an “apples and apples” basis.
- Stay away from pass-through contracts. They are complex and difficult to understand, and most importantly will come with little or no security against adverse changes to the industry and networks. What appears to be a good deal on day one can often become a poor and detrimental deal several months down the line.
Article by: David Kendall
This is an article from: Insight & Innovation: Issue 4 – click here to read the whole newsletter.