4 things most people don’t know about their energy contract
4th February 2021
The last 12 months have been turbulent. Many organisations have faced unprecedented uncertainty, with a return to business as usual still out of sight.
The past year of rolling lockdowns - local, regional, and national - has bled into a new year, where we face both economic uncertainty and continued restrictions. Saving money and staying afloat will be the top priorities.
All businesses will have outgoings at a time when income is not guaranteed. Your energy contract is unlikely to be front of mind, but over the course of the pandemic we’ve seen businesses renewing their contracts, rather than shopping around or falling into rollover rates.
Businesses are looking for certainty and stability at a time when it’s been hard to find. Depending on the exact terms of your energy contract, there may still be room for uncertainty.
Now is the right time to familiarise yourself with your energy contract and to look for those charges or elements that could have an impact on your business.
Increases in Third Party Costs
The total cost of energy comprises lots of various charges. Only around half of the final cost of your bill comes from electricity. The rest comes from third party costs (TPCs).
These costs - also called non-energy or non-commodity costs – include the costs of energy distribution and transmission, grid balancing, and environmental charges like the Climate Change Levy. These charges are paid for by energy suppliers, who then charge end users.
Customers on pass-through contracts will have these costs charged directly. Customers on fixed contracts should look closely to see which of the costs are fixed; some may not be.
We make it clear upfront what these costs are, and we’re always on hand to help if you need us to explain anything about the costs passed through on your bill.
We expect third party costs to rise this year due to COVID-19. The pandemic created difficult circumstances for the energy network, making it more expensive to manage the grid. You can find out more about the impact of COVID-19 on the energy network here.
The additional costs incurred as a result will be passed through to suppliers.
Charges will increase to cover this cost. Some organisations that used less electricity during the pandemic may find their bills have fallen by less than expected, while customers who worked throughout the pandemic may find their bills are higher than usual.
To find out more about how third party costs might impact you over the coming year, download our latest TPC guide.Download our free guide today
Renewables Obligation Mutualisation
The Renewables Obligation (RO) was a support mechanism for large-scale renewable energy projects, administered by Ofgem (now replaced by the Contracts for Difference mechanism).
The RO requires energy suppliers to source a percentage of their electricity from renewable sources. The Renewables Obligation is funded by suppliers, with the costs recouped from consumers.
RO mutualisation happens when the amount paid to Ofgem falls short. As the RO is paid in arrears, this shortfall is spread across all suppliers. The sum any supplier pays is determined as a percentage or proportion of their share of Renewables Obligation Certificates (ROCs).
As a result of difficult trading conditions and the ongoing impact of COVID-19, we expect that mutualisation may occur again in the next compliance period.
You can find out more about RO Mutualisation here.
Targeted Charging Review (TCR)
Ofgem’s Targeted Charging Review (TCR) is intended to reduce distortion across the energy network, ensuring that charges are cost-reflective and paid by the right end-users.
The TCR was introduced because larger energy consumers - who often contribute to the most to system stress - are also more sophisticated and better able to predict when prices may be highest. This enables them to lower their consumption during these periods; this is called triad avoidance or red zone avoidance.
The TCR is a wide-ranging programme, with little certainty around the distribution of charges following the review. This creates contractual uncertainty; 2022 is only months away and as a result, many decision makers will have to prepare for potentially increased non-energy costs over the next 12-14 months.
Reforecasting and volume tolerance
Volume tolerance clauses are a common element of energy contracts for medium and large business customers; they are a partial cost recovery mechanism, designed to protect suppliers from significant consumption deviation from a customer’s original forecast. This helps National Grid and District Network Operators (DNOs) to manage the network appropriately.
Typically, tolerance clauses offer variance of around 20% above or below the customer’s pre-calculated annual energy consumption. However, the dramatic impact of COVID-19 on the energy network means that many suppliers are now likely to be more cautious.
While we can try to accurately predict future demand, we don’t know how businesses will be impacted over a sustained period. We consider circumstances on a case-by-case basis and always adopt a consultative approach with our customers, to help you navigate through any challenges.
In our constantly changing world - and as we continue to adapt to cope with COVID-19 and its impacts - it’s vital to ensure that your contract doesn’t contain any unpleasant surprises. We’ll do our best to help you, every step of the way.
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