A fixed price contract is usually a good option for customers who want peace of mind, because your energy costs and non-commodity costs remain fixed, allowing you to manage your budget with a fair degree of certainty.
It is important to note that you will not gain absolute certainty, however, because suppliers have access to a mechanism to recover increased costs incurred if they interpret them to be caused by a change of law. This will be in your contract terms and conditions, but can easily be overlooked.
Change of law clause
When there is a change in law or regulations that affects the cost to supply energy to your premises, your supplier reserves the right to increase your fixed price during the contract.
Suppliers will forecast the cost of your electricity and then factor in a small profit based on what they know of the other costs that they will have to pay in order to supply those premises. There have been many examples in recent years that have brought the change of law clause into practice when suppliers will face increased costs as a result of changes to charging mechanisms. These include the Levy Control Framework; the Energy Intensive Industries Exemption; and the Capacity Market.
Ofgem’s Targeted Charging Review is now bringing the change of law clause into focus again, due to proposed changes to use of system charges. These are some of the third party costs, or non-commodity costs that pay for the systems that distribute and transmit energy to your business.
Ofgem is seeking to make the charges fairer by redistributing the share of the costs. However, in order to allow the Energy Intensive Industries to remain competitive globally, it means that businesses with a moderate level of electricity consumption will likely see the cost of supply – known as network charges – significantly increase.
While the changes will not start until 1 April 2021, suppliers may adjust their existing fixed price contracts that continue beyond that date mid-contract to allow them to recover their increased costs. Since suppliers will be impacted differently according to the markets in which they operate, we are seeking confirmation about their planned response. Those who mainly supply large users, or domestic users, will not see much impact. However, those suppliers who operate largely in the middle ground will face the highest costs.
If you are in any doubt about the terms of your contract, speak with your account manager.