Business Cost Consultants

The Known Knowns and Unknowns of Securing an Energy Contract

Blog post   •   Feb 15, 2013 12:15 GMT

Donald Rumsfeld, former United States Secretary of Defence, is known, amongst other things, for the following quotation:

“There are known knowns; there are things we know we know.
We also know there are known unknowns; that is to say, we know there are some things we do not know.
But there are also unknown unknowns – the ones we don’t know we don’t know.”

It is perhaps not the most succinct way of summarising a situation but it got me thinking about some of the frustrations businesses frequently encounter when securing an energy contract. There are so many elements of charge being presented to the customer and there can be general confusion over the terms and conditions as to what elements are actually fixed or potentially subject to change.

The Known Knowns

Unless a contract is specifically agreed on flexible terms or with pass through components, we find the majority of business customers want to agree a fixed price for the term of the energy contract. This avoids the nasty surprise of catch up reconciliation charges further down the line which is becoming a more common concern for businesses and can result in an invoice for thousands of pounds. Additionally, some suppliers take their time to carry out any reconciliation, not providing it until several months after the contract has ended.

When time is taken to look at the small print of any energy contract all that is really agreed for the term of the contract is the energy component itself.

The Known Unknowns

Other elements of charge such as distribution, transportation and metering may be presented as ‘inclusive’ and give the appearance of being fixed but in most cases the suppliers will reserve the right to pass on any subsequent change to the customer. Some businesses may be aware of this but without appropriate guidance will find it very difficult to forecast or project what any future changes or increases may be.

The same can be said of carbon taxes such as the Feed-in-Tariff (FIT) and Renewable Obligation (RO), the charges for which have increased significantly. With the uncertainty of FIT costs, most suppliers freely admit they do not know what the actual charges will be over the next year. The scale of these charges and the way in which they have been applied are becoming an increasing burden and challenge to businesses.

Unknown Unknowns

If an energy contract is presented as fixed is it really fixed? The small print in the terms and conditions often enables the supplier to pass through additional charges or any new charge imposed on the supplier. Can the message from the utility company be relied on when trying to sell an energy contact?

Suppliers are often unwilling to protect businesses against government taxes and levies. Whilst most customers are now familiar with variable rates of Climate Change Levy (CCL) there is great uncertainty about the scale of future FIT increases. Is there scope for the government to introduce further green taxes?

We are constantly reminded about the threat to security of supply and a drive towards a greener economy. It isn’t unthinkable that an additional charge or tax could be levied to support our energy infrastructure.

In December 2012, DECC announced that the Carbon Reduction Commitment (CRC) would remain in place until at least 2016 but there were calls for the CRC tax to be replaced by a CCL style of charge. Might this have distilled to other businesses outside the CRC catchment?

Summary

As Donald Rumsfeld said, we should pull together the known knowns and known unknowns to try and make the best sense of the current situation. There is an increasing requirement from businesses for specialist advice in helping navigate the uncertain waters of energy procurement and contract negotiation.