UK: THE LONG AND SHORT OF IT. - Which corporate contracts best suit shifting energy prices?

Last Updated: 31 Aug 2010

Which corporate contracts best suit shifting energy prices?

Over the past few years, partly through the intervention of the industry regulators, energy prices in the corporate sector have been falling steeply in real terms. Against this background, what kind of contract should a corporate buyer of gas or electricity seek to negotiate?

Electricity prices are still coming down, says John Henderson, a senior partner at ECM Partnership, a specialist consultancy offering advice on energy costs to corporate clients. 'The recommendation in a falling market is that you take as short a contract period as you can get.' The trick is to recognise when the market hits bottom, for that will be the time to move to a long-term contract. Henderson doesn't believe that electricity is at present even close to stabilising - indeed he is forecasting further falls over the next three years. On the other hand he does believe that gas prices will soon stop falling.

So his message for corporate punters is: 'long-term gas contracts, short-term electricity contracts'.

In the gas industry, contract prices tend to be fixed although this may change in the near future. In the electricity market customers can choose between fixed-price or floating ('pool') contracts. With prices currently falling, the biggest sites are apt to go for pool contracts (in which prices are reassessed every 30 minutes). However, the pool price is prone to violent swings, which is a major deterrent for some users. 'The pool's got too spiky,' says Don McGarrigle, chairman of the electricity group at the Major Energy Users Council and energy adviser to Castle Cement, a large guzzler of electricity. Last winter the pool price hit £1.23 per kilowatt-hour - the result of a nuclear plant coming off-line - compared with the normal price of 2 or 3 pence per kWh. McGarrigle feels happier to see Castle on a fixed price contract.

On the gas front, Eddie Proffitt, head of purchasing at Pilkington (and chairman of the gas group at the Major Energy Users Council), admits to running into problems over a recent contract. Proffitt tied in Pilkington to a 15-month contract, then prices plummeted part of the way through last year. 'A lot of buyers, myself included, were caught with contracts which were fairly high and had 12 months to run.' Because of this, a popular tactic with many purchasers last year was to look around for a better deal, then ask the supplier to match it.

A gas industry insider is far from confident that the price has stopped falling: 'My information suggests that our competitors are still complaining about underpricing. Within the market there will continue to be a certain amount of loss-leading, as a number of suppliers strive for greater market share.' Nevertheless he notices suppliers offering longer term contracts.

'If you're in this market with a very low price you're happy with, then it's very simple now to get tied into that price.'

But is price the only other thing that matters in an energy contract, aside from its length? Sue Amies-King, sales and marketing manager at Yorkshire Electricity Group, maintains that large corporate users increasingly appreciate the benefit of good service from their energy suppliers. Neville Baltrop, media relations manager at British Gas Trading, sings from the same sheet: 'We may not be the cheapest, but we offer better service'.

The claim strikes Eddie Proffitt, a former customer of the ex-monopoly, as laughable. 'The service from British Gas is diabolical,' he says. 'There's no way they can claim people stay with them for service. People only stay with them out of inertia - it's simply easier to stay with your existing supplier.'.

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