How it could help save your business money on gas & electric bills
Following the withdrawal of the Energy Bills Relief Scheme (EBRS) at the end of March and the introduction of the new Energy Bills Discount Scheme (EBDS) at the beginning of April at a lower level of support, many businesses have been worried about their energy bills.
EBRS gave customers a discount of between 20p and 40p on their unit rates while the replacement EBDS will see discounts of between 1p and 2p per kWh.
There is a way to potentially reduce energy bills in the short term called blend and extend.
This extends the length of a company’s current energy contract with their supplier but immediately lowers the rates paid. It allows corporate customers to benefit from any drops in market prices even if they are already signed up to a fixed term contract at higher rates.
How does blend and extend work?
The gas and electricity rates on the existing contract is “blended” with the current market rates in order to give a new unit price for the energy used.
This new blended rate won’t be as high as the current rates being used but won’t be as low as current market rates.
They will start paying the new rate immediately and the contract will be extended, which the rate will be fixed for, providing a degree of certainty for a longer period.
A previously rare option, more suppliers are offering these blended arrangements to customers that signed for fixed term contracts when the gas and electricity prices were at their peaks.
Advantages and disadvantages of blend and extend
The benefits include:
- Instant cheaper rates on gas and electricity so you will pay less
- Rates are locked for a determined period so provide certainty and will protect the company from additional price rises during this time
Other factors to consider that might not be as beneficial are:
- The rates offered in a blended contract will not be the lowest available
- A blended contract will run for a longer period so if you’re current deal is running out, it might be worth waiting for then and signing up to the lowest fixed rate available at the time rather than securing a slightly lower rate now for longer
- You’re contracted to this supplier for longer which is fine if you like your service but if you don’t, you have to stay with them for the duration
What would a typical blended contract look like?
The Federation of Small Businesses (FSB) has come out in favour of blended contracts claiming that without this approach as many as 370,000 additional small businesses could be forced into administration or liquidation due to unmanageable energy bills.
Let’s work through an example – a business is paying 65p per kWh for electricity and has six months remaining on the supply contract.
The supplier offers them a 24 month “blend and extend” contract with rates of 50p per kWh. If agreed this rate would become current and would be extended for a further 24 months so the business would pay a fixed rate of 50p per kWh of electricity for the next 30 months.
If the business used 15,000 kWH of electricity over the course of the contract (which is the average use for a micro business) then they would pay £12,500 for this use – excluding standard charges.
If they chose to wait out the rest of the contract and see what the lower priced rate deal would be then let’s assume they would pay 65p per kWH for six months then were able to secure a rate of 35p per kWh on a new two year deal when it expires.
In this scenario, they would pay £3,250 for the electricity in the six months of their current deal and an additional £7,000 for the electricity under the terms of the new contract. Overall this would be £10,250 for the same.
While this would be £2,250 cheaper over the course of 30 months, if the business is facing cash flow problems then an immediate reduction in fixed bills would be beneficial.
For many sectors, even with support, the energy price crisis could prove critical.
Kate Nicholls, chief executive of UKHospitality, said: “If the government is to achieve its aim of halving inflation, it simply must tackle the ever-growing cost of doing business.
“Food price inflation for the hospitality industry has increased to almost 22%. Energy costs are hitting farmers, food producers and manufacturers and hospitality businesses and will result in entrenched inflation, unless businesses can get out of energy contracts that were fixed far above the current market rate.
“Ofgem’s review into the non-domestic energy market is positive, it has been ongoing for at least six months with no conclusions. The severity of the situation facing hospitality businesses requires far more urgency from the regulator and this inaction has resulted in business failures, which we have continuously warned of.
“If Ofgem is unable to act and intervene in the energy market, compelling suppliers to renegotiate with customers then I would urge the government and CMA to step in, properly investigate the market and do right by hard-working businesses by taking meaningful action.”
Blend and extend is just one tactic that businesses can use to help lighten their financial load every month but eventually there comes a point when no more corners can be cut or fat trimmed.
That’s why we offer a free initial consultation for any director or business owner who can’t see a clear way back to profitability for their company.
We’ll talk through all their options and what the best course of action for them could be – whether they can realistically restructure and resurrect their business through administration or a CVA or if a voluntary liquidation would be the best way forward to address their debts.
No matter what path is the most plausible, they will discover different ways to approach their issues which might open up new avenues they might not have thought available.
The first step on any journey is sometimes said to be the hardest but with us it’s the easiest – just get in touch!