Calls for ‘blend and extend’ contracts for small firms

Energy suppliers have been urged to allow small firms on fixed-term contracts to renegotiate their deals to reflect the significant drop in wholesale prices.

The call from the Federation of Small Businesses (FSB) comes following the recent replacement of the Energy Bill Relief Scheme (EBRS) with the less generous Energy Bills Discount Scheme, a move which the FSB said “changes support to pennies that do not touch the sides of huge bills”.

It said the change in support means firms which fixed their tariffs last year will see bills revert back to 2022’s peak levels which could be “three or four times what they were paying” when the previous support scheme was in place.

Research by the organisation found that between 1 July and 31 December last year, a period when businesses were quoted up to £1 per kWh for electricity, more than one in ten (13%) small firms fixed their energy bills.

It added that 13% of this group, equating to 93,000 firms, say they could be forced to either close, downsize, or radically restructure their businesses. Furthermore, just over four in ten (42%) that fixed contracts in this period said it has been “impossible for them to pass on costs to consumers” amid the cost of living crisis.

As a result of its findings, the FSB is calling on energy suppliers to allow these firms to extend their fixed contracts but at a blended and lower rate – between their original fixed rate and the current, lower wholesale rate.

It said this option should be made automatically available to businesses which:

• Negotiated the new energy contract between 1 July and 31 December 2022
• Can confirm the level of wholesale price on the contract is above the EBRS wholesale price cap
• Can confirm the end date of the contract to demonstrate the length of exposure to higher prices from April 2023 onwards

FSB policy chair Tina McKenzie said: “Having come out from a tough winter, this spring is supposed to be the beginning of economic recovery, but tens of thousands are still very much in survival mode because they are tied-in to sky-high energy contracts.

“Many small businesses agreed to lock in energy contracts last year to ensure they qualified for the maximum level of government support. Now, with that support largely disappearing, they are once again faced with massive energy bill hikes as rates go back to pre-Energy Bill Relief Scheme level.

“If ending the successful support scheme is on the basis that wholesale energy prices have gone down, then our research sheds light on just how many small businesses have been overlooked as they are entangled in high fixed tariffs.”

She added: “The least energy suppliers should do is to allow small businesses who signed up to fixed tariffs last year to ‘blend and extend’ their energy contracts, so that their bills are closer to current market rates. We’d also like to see the government and Ofgem support this initiative.”

Responding to the FSB, an Energy UK spokesperson said suppliers understood the challenges facing businesses and that they continue to work with Ofgem, the government and business groups to address these. They said that many are offering to renegotiate and extend existing contracts where possible.

The spokesperson added: “It is important to bear in mind that when contracts have been agreed and signed, energy is purchased at the prevailing market rates on behalf of the customer – meaning it is a commercial decision for the supplier concerned whether they can offer such flexibility.

“A subsequent fall in wholesale prices doesn’t alter the fact that with such fixed contracts, the supplier will have bought the energy when costs were higher. Indeed suppliers were being encouraged to offer fixed-term contracts at that time, which were more affordable than the alternatives, but many had the foresight to offer shorter terms than usual so as to avoid locking in high prices for longer than necessary, in the case that wholesale costs fell, as has happened.”

An Ofgem spokesperson said: “We know that many businesses are locked into fixed-price contracts signed last year that are much higher than the current market would deliver now, and that these costs are posing an enormous challenge for some businesses.

“While as a regulator, we can’t unpick private contracts, we want to see commercially sensible solutions that help non-domestic customers, and we recently wrote to suppliers to ask them to show flexibility, and we will continue to press suppliers on this, while we review the regulation of the non-domestic market more broadly.”

A Department for Energy Security and Net Zero spokesperson said: “We recognise this has been a uniquely challenging period for many businesses, which is why we have spent over £5.9 billion to date – over £30 million a day – to protect UK industry from the effects of Putin’s illegal war, saving many around half on their wholesale energy costs this winter.

“Contract negotiations are ultimately a matter for suppliers and their customers. However, we are in regular discussions with them and Ofgem to make sure businesses get a fair deal.”