18 Oct 2018
COMMUNAL ELECTRICITY & GAS
The Elm Group energy contract came to an end on 30 September 2018 and we have entered into new contracts with effect 1 October for a period of 24 months. After some negotiation Southern Electricity remained the most competitive supplier within the electricity market and the contract was renewed for 24 months, however we have taken the decision to change the structure of the gas contract and our supplies are divided between 2 contractors– Total Gas and Power provide the majority of our sites whilst some of the largest consuming meters have been contracted with Gazprom.
The current markets
When we updated you in August the markets were experiencing a 7 year high and we were aware that as we were exiting a 2 year fix we would be faced with a high increase in costs. Initial observations suggested somewhere in the region of a 34% for electricity and 6% increase for gas. Between the period 25th August through to w/c 10th September the markets continued on this upward trend with increases across the board. Our broker’s advice was as follows:
- it was felt that the markets could not sustain the drastic upward trend. At some point a ceiling would be reached and prices could potentially ease into next spring or summer, however if we contracted for a 12 month period we would be gambling that the markets would have recovered sufficiently by time we tendered next year
- additionally supply issues over the winter, tax breaks and high demand for LNG in Asia look set to remain unchanged and uncertainty over Brexit will surely affect the commodities as we get closer to the event, perpetuating further increases
- to remain out of contract, under variable rate terms, in preparation to renegotiate if and when the markets recovered, would not really benefit our leaseholders. Our previous strategy had been to manipulate the contract end dates to take advantage of purchasing in the summer months. This provides us with the best opportunity to secure the most competitive rates and to deviate from this could weaken our position long term.
Taking into consideration all of the information above our decision was to proceed as advised with the 24 month contract.
Electricity – what was different this year?
Although benefitting from our corporate contract (the power of bulk buying) the electricity tenders are always priced and tailored to each individual supply based on a number of factors including meter type, geographic location, annual gross consumption and usage patterns. In previous renewals the increase in costs had been similar across our entire portfolio, however this year there were some variations. The tender consisted of 193 supplies:
- the overall % increase against current costings was 34% (£99,845)
- 62 supplies face increases in excess of 34% (in a range between 35% and 65%)
- 129 supplies face increases (in a range between 3% and 35%)
- 1 supply’s estimated consumption and contract rates have stayed exactly the same
It was apparent within this renewal that some of the smaller consuming supplies will see a marked increase in their costs over the next couple of years. This is due to suppliers having to incorporate a premium within their standing charges to allow for an upgrade to AMR (automated meter readers) or smart meters in line with a government initiative to move the UK towards a smarter business electricity network and a greater efficiency. Our team of Area Managers have been advised of the individual estate prices increases and future budgets will be adjusted accordingly.
Information in the media doesn’t reflect these 34% increases…………
We have received some comments from leaseholders/owners with findings they’ve based on the domestic energy markets as opposed to the commercial or business markets. The UK Energy Price Rise Report 2017 suggests an annual price increase between 6.9% and 9.8%, however this is specific to the domestic market. By way of an explanation a supplier generally revises their domestic tariffs once or twice a year, but the commercial energy markets are tailored to a portfolio or specific supply on any particular day and prices offered track the movements within the commodity market.
Our last energy renewal was signed on 31 August 2016 and since this point there have been wholesale commodity increases of 49.6%. And as previously identified a domestic supply is not subject to the same tariffs and third party costs that make up approximately 60% of the bottom line commercial energy spend (breakdown below for your information).
Gas – why did we change the structure of the portfolio?
Our corporate gas portfolio is much smaller that the electricity consisting of 25 supplies. In our preliminary costing we had identified somewhere in the region of a 6% uplift, offered by Total Gas & Power, considerably cheaper than the other 2 tenders at that time. Again the markets had changed considerably in w/c 10 September and prices available had increased. When we considered the offer in detail we identified an issue which would have put the majority of our leaseholders at a disadvantage. Our broker has explained as follows:
Our previous contracts had been agreed on a weighted average basis, where the unit rate and standing charges applied were averaged so that each estate pay the same rates. This strategy had worked very well but recent additions to our portfolio of some larger, commercial type meters affected the benefits of using this system. The larger consuming meters attracted a higher standing charge due to the asset (meter) size and capability – if we priced the group as a weighted average the remainder of the portfolio (with smaller consumption) would be detrimentally affected by the higher standing charges.
Our broker’s advice was to divide the portfolio, removing the largest consuming meters to price on a tailored package and keep the remainder on a weighted average product. There were increases across the whole portfolio but by recognising the individuality of our estates the largest consuming meters benefitted from a much more competitive unit rate, but the lesser consuming meters didn’t experience a double impact ie a large jump in standing charges and the same increase in unit prices too.
- the overall % increase against current costings was 20% (£24,651)
- 17 supplies face increases in excess of 20% (in a range between 35% and 65%)
- 8 supplies face increases (in a range between 4% and 20%))
Again our team of Area Managers have been advised of the individual site increases and future budgets will be adjusted accordingly.
One of our Elm Way commitments is to ‘at all times, act with integrity, honesty and transparency’ and we have created this document to provide a full update on our recent energy renewal process. We appreciate increases in prices are never going to be welcome and we work hard with our broker to secure the best deal available for our leaseholders at renewal. We would always recommend that it’s preferable for energy supplies to be placed into a contract and our experience has been, when taking over new business, that it’s not unusual to see supplies on an out-of-contract, variable rate basis, attracting 20% vat. We work closely with our broker, a market leader in energy purchasing for over 20 years, and we are confident their expertise is beneficial to our leaseholders. We would also like to reassure you that we do not, and never will, accept any sort of commission for this service.
I hope the information has been of interest and please feel free to come back to me if you have any further queries.
Gill Birch, Head of Services