Fixed-price energy contracts for industrial and commercial businesses are about to get much more expensive – and likely far less ‘fixed’ than consumers believe.
In a post-COVID world, Chris Hurcombe, CEO of Catalyst Commercial Services, believes fixed-price energy contracts will ultimately disappear as suppliers struggle to predict consumption patterns and attempt to insulate themselves from risk.
He notes that 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.
“Over the next few years, a typical fixed contract will look very different,” says 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 continues.
“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 says fixed-price energy contracts currently carry a 10% price premium in compared to flexible contracts. Next year, he predicts that premium will rise to 15 – 17%, and beyond 20% from 2022.
“Flexible contracts in a post-Covid world will offer more benefits to business” says Hurcombe.
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, businesses will increasingly benefit from taking flexible contracts, he says, even in their most basic form.
Given the UK’s industrial and commercial businesses consume around 185TWh of power per year, equating to some £27 billion ($35.5 billion) at 14.5p/kWh, Hurcombe says the collective savings would be substantial.