Fixed energy contract prices for industrial and commercial businesses are set to soar – and are likely far less ‘fixed’ than consumers believe, an independent consultant has warned.
In a post-Covid world, Chris Hurcombe, CEO of Catalyst Commercial Services, believes fixed-price contracts may ultimately disappear as suppliers struggle to predict consumption patterns and attempt to insulate themselves from risk.
Ongoing uncertainty around home versus office working combined with suppliers having to recoup commodity losses and deferred non-commodity costs, such as balancing and network charges, is already starting to bite, he suggests
“Over the next few years, a typical fixed contract will look very different,” said Hurcombe.
“Post-Covid, there are too many unknowns for suppliers to price them accurately, so they are doing everything possible to de-risk contracts. Credit requirements are going up and some suppliers are not pricing for certain industries without an upfront deposit or a significant price premium,” he added.
“Suppliers have been badly hit by Covid. For business customers, it means any wriggle room in terms of under or overconsumption is quickly becoming a thing of the past.”
Hurcombe said fixed-price contracts currently carry a 10 per cent price premium compared to flexible contracts. Next year, he predicts that premium will rise to 15 – 17 per cent, and beyond 20 per cent from 2022.
Because suppliers can use terms and conditions to reopen contracts and claw back money from customers, Hurcombe questions whether they offer any value to the consumer at all. On the flip side, he believes businesses will increasingly benefit from taking flexible contracts, even in their most basic form.
Given the UK’s industrial and commercial businesses consume around 185TWh of power per year, equating to some £27bn at 14.5p/kWh, Hurcombe said the collective savings from flexible contracts would be huge.
Fixed versus flexible contracts
With a ‘fixed’ contract, businesses make one decision on the price of energy and lock out for the term. It usually includes a premium on the commodity (the physical power or gas) and the non-commodity elements (environmental levies, balancing costs and network charges). The non-commodity part is now the largest portion of the bill, and therefore carries the largest risk. Hence most contracts allowing suppliers to pass through any increases, meaning they are not actually fixed.
Flexible contracts spread the risk of buying energy throughout the year. The basic aim is to buy the dips in wholesale market prices, procuring in smaller chunks to achieve a better average price than committing in one go. Flexible contracts also allow businesses to reduce or avoid some non-commodity costs. They have historically been for larger businesses, but many third party intermediaries are now putting together group deals, or ‘basket buys’ so that mid-size companies can take a flexible approach.