What manufacturing businesses need to know about their energy contracts

3 mins read

By Anthony Rance, Partner at national law firm Weightmans

Energy prices have dominated media headlines – not to mention everyday conversations – for what feels like months now. There is little sign of let-up either. Many businesses are now paying, in some cases, triple what they were paying a year ago for their energy.

The Government’s Energy Bill Relief Scheme (EBRS) was unveiled in September and was designed to secure lower energy costs for eligible businesses and bring protections closer in line with those applicable to domestic customers. This was initially set for a six-month period covering October to April. Now, the Government has unveiled its plans for post-April, with the so-called Energy Bills Discount Scheme (EBDS). However, will the EBDS provide the relief that manufacturers are seeking? And what can businesses do if they are unhappy with their existing contracts?

Here, we examine some key points businesses need to be aware of when it comes to energy contracts, their rights and what the EBDS proposals mean for them.


Business energy contracts

There are a variety of different types of contract for commercial energy consumers and much depends on the size and type of the business, its energy needs and its appetite for risk.

Fixed contracts, where charges are based on a set rate per unit (or KwH) of energy have historically been an attractive option for businesses. Bills will vary depending on usage, but the charges should, at least in theory, remain based on a fixed price for the contract term, providing certainty.

The EBRS offers a different level of support for fixed contracts compared to variable contracts and is weighted in favour of fixed contracts. However, the new EBDS does not have such a distinction.


Government support

The new Government proposals no longer seem to encourage fixed rate contracts. Under the EBDS, businesses will get a discount on the wholesale price of energy rather than costs being effectively capped, as they were under the EBRS. The help available under the EBRS was argued to be too expensive to be maintained in the medium to long term.

While wholesale prices have started to drop compared to the early stages of Russia’s invasion of Ukraine, they remain up to four times higher than their long-term average – so the newly-proposed discounts may not provide all that much relief for businesses, and likely less than they have been used to under the EBDS. There is additional support available however, on application, for intensive users of energy in sectors such as steelmaking, food production and glassmaking. Nonetheless, manufacturers across the country will no doubt be reviewing their existing energy agreements and considering how to prepare for the future. It will therefore remain important for businesses to understand the nature of the contracts they enter into, to avoid getting caught out. 


Is a fixed contract really fixed?

One thing to be wary of is whether a contract is actually fixed, or whether it has a variable element (so-called “pass-through” contracts).  Even when a fixed tariff is agreed though, it may still be possible for suppliers to look to increase their rates if their contract terms allow for it. For example, a contract may state that a supplier can pass on increased costs if the cost of supply would outstrip the revenue being earned. Business customers do not benefit from the same protections as domestic customers so a dispute concerning such price hikes would ultimately come down to what the contract actually said.

The first step for any firm on the receiving end of such a hike is to make sure that any relevant terms have been properly incorporated into the contract, as well as checking what representations were made before the contract was agreed. If the contract was procured on the basis of a misrepresentation, they may have legitimate grounds for challenge.


What if businesses want to move supplier?

Given the continuing market volatility, businesses may still want to shop around. Cancelling a commercial energy contract is, however, more complicated than cancelling a domestic contract. One of the main pitfalls to watch out for is failing to notify your supplier that you want to terminate your contract within any specified window. Depending on the size of your business and the supplier in question, the supplier may not be obligated to notify you that the contract is ending and it may automatically “roll over”, meaning you may end up being locked into another long-term contract on higher rates. Seeking to terminate in that scenario could then be an expensive business.

Whatever you do, it always pays dividends to make sure you understand exactly what contract terms you are signing up to, before you sign on the dotted line.