Safety in numbers

Amid a growing backlash over the underhand practices of rogue energy brokers, Tom Grimwood looks at the current state of the non-domestic retail market and new proposals to cut out the middlemen using collective auctions.

Compared to the now highly regulated market for domestic energy consumers whose prices are tightly controlled, the non-domestic market is bit of a Wild West.

Domestic customers can pick from a set of standardised tariffs that are, generally speaking, available to all. However, suppliers are under no obligation to serve non-domestic customers. The contracts they are willing to offer can vary significantly depending on the specifics of each business and the risks they pose.

These variations can make it difficult to compare offers. Many small businesses lack the time, knowledge and resources to find and negotiate a good deal, or even work out what one looks like. Most therefore rely on energy brokers to do so on their behalf. However, these brokers – also known as third party intermediaries – do not fall under the direct jurisdiction of the usual sheriff in town, Ofgem, and customers can easily fall victim to cowboys.

This long-running problem has once again been put in the spotlight in a review of the market by Future Energy Associates. The consultancy says “inadequate regulations, opportunistic suppliers and unscrupulous energy brokers” have resulted in some smaller businesses paying over 50% more for electricity and 200% more for gas than their larger counterparts. These customers are “now awakening to the injustices they’ve endured and are calling for regulatory reforms and market structures that can pave the way for transformative change”.

There are now around 3,000 brokers operating in Britain but there are “no prerequisites, examinations, or formal qualifications necessary to establish oneself as an energy broker”. Neither are there any regulations governing the size of the commissions they can charge, which have often been “discreetly embedded” into unit rates. If they are disclosed, this is often done verbally, rather than in writing.

To the extent that there is regulation of brokers, this is “channelled through the energy supplier collaborating with the broker”.

These contracts are typically longer than fixed price tariffs for domestic customers, sometimes lasting up to five years, but there is no guaranteed cooling off period enabling them to back out if they are unhappy with their supplier or pricing. They can include “extortionate exit fees” and “steep penalties” for breaches.

Customers who fail to inform their supplier of their intention to switch within the designated window at the end of the contract can be automatically rolled over to a more expensive default tariff, “potentially committing them to another year or longer at a fixed rate”.

Less scrupulous brokers, deliberately target smaller businesses, “taking advantage of their limited time and knowledge”.

“Sadly, the most profitable prospects often encompass small companies with substantial energy requirements, including year-round heating needs for care homes, hospices, as well as family-operated hotels and restaurants,” the review explains.

As well as the non-disclosure of commissions, poor practices by brokers also include “the coercion of businesses into disadvantageous energy contracts, the utilisation of aggressive cold-calling tactics, and the manipulation of end dates to lead businesses into unfavourable contracts”.

“Perhaps most alarmingly, some brokers have even resorted to impersonating energy suppliers,” the review adds.

“There are even accounts suggesting that energy suppliers share culpability with energy brokers, rewarding those who successfully enrol customers in their customarily unfavourable tariff schemes.”

Follow the money

Although Ofgem does not have the power to directly regulate energy brokers themselves, it has taken steps to address their worst behaviours through the suppliers they operate with. Last year, the regulator introduced new licence conditions requiring suppliers dealing with microbusiness to clearly state brokers’ commissions in their contracts with customers and only deal with brokers registered with a qualifying alternative dispute resolution scheme. Earlier this week, the regulator announced plans to extend these protections to more businesses.

Octopus Energy has urged the regulator to go further and introduce a cap on brokers’ commissions. It has also urged the government to give Ofgem the proper powers to directly regulate brokers, which it said should no longer be allowed to make unsolicited contact with customers.

There have also been growing efforts to claw back hidden commissions from brokers and suppliers via the courts. Former energy broker Callum Thompson founded Business Energy Claims specifically for this purpose and several other law firms have also launched group actions against large suppliers.

Announcing one such case in June, Graham Small, a partner at JMW Solicitors compared the situation to the mis-selling of payment protection insurance by mortgage lenders and suggested total compensation claims could “run into many millions, if not billions”.

In October, law firm Harcus Parker announced that more than 4,500 organisations across England and Wales have joined a £2 billion group legal claim in a bid to reclaim payments made to “unscrupulous” energy brokers. Among those to sign up to the claim are 2,801 shops and restaurants, 703 health and beauty businesses, 477 professional services businesses, and 164 sports and community groups. The claim relates to alleged “hidden commissions” paid to energy brokers from retailers including British Gas, Eon and SSE.

Future Energy Associates says the current lack of regulation is one of the main reasons why small and medium-sized enterprises (SMEs) are paying significantly more for their energy than larger companies.

Citing data from the Department for Energy Security and Net Zero (DESNZ), its review highlights a clear correlation between the size of businesses and the amount they pay for energy, with the smallest firms paying the most. It says the gap between very small and very large businesses has been rising steadily to around 3p/kWh for gas and 4p/kWh for electricity. In both cases, this makes up a sizeable share of the overall rates paid by very small businesses.

However, Dylan Johnson, commercial director at Future Energy Associates, says there are also other problems that need to be addressed. In addition to a “general lack of understanding regarding fair deals”, expensive hidden commissions and a “vulnerability to costly rollover contracts”, the current market leaves SMEs with little incentive to install smart meters due to the limited offerings for time-of-use tariffs that can take advantage of them.

The review says under half of these businesses are likely to have smart meters installed currently – well short of the government’s target of 73% by the end of 2025. Johnson says this “underscores the necessity for introducing tariffs that specifically reward the usage of smart meters, thereby encouraging their adoption”.

The current arrangements also create issues for suppliers, including “high customer acquisition costs” and “credit risks from financially stressed SMEs”.

Group action

Future Energy Associates believes the solution to these many problems may come from safety in numbers.

In September, the consultancy was one of five organisations to be awarded government funding to conduct feasibility studies on the creation of new tools to enable non-domestic customers compare energy tariffs.

For its part, Future Energy Associates is looking to develop a software platform for bundling together numerous customers and then holding auctions in which suppliers would compete to serve them. As well as cutting out the middlemen entirely, Johnson says its proposed platform would “leverage collective bargaining power” to secure the best prices for small businesses.

To continue reading this article, click here to access the Digital Weekly issue of Utility Week where it first appeared.