In the old days it was simple. You bought gas, electricity and water consumers are promised major cost-savings as a result. Rob Outram finds out what accountants in business and practice need to know. from monopoly suppliers. They were ‘boards’ not companies, and the only marketing they normally engaged in was the occasional advert to remind customers how well they were doing.
Things are very different now. Water is still likely to be a monopoly for the foreseeable future for all but a handful of large users, but the electricity companies are vying to sell gas to business and domestic customers, and British Gas is fighting back with the promise of cheaper electricity.
Today, the monopoly in gas has become a free-for-all and the same is set to happen for electricity later this year. Small businesses as well as consumers now have choices and opportunities to save money not possible before.
The largest businesses have enjoyed the benefits of competition for some time. The gas and electricity regulators allow them to negotiate individual contracts with the utility companies. Businesses using more than 100 kilowatts in electricity each year – worth around #12,000 at today’s prices – can already pick and choose.
Since 1992, those using more than 2,500 therms of gas annually – approximately #1,100 – have been able to sign up with suppliers other than British Gas.
But until now, most customers have been stuck with British Gas, on the one hand, and their regional electricity company on the other.
Following pilot schemes in the South-West and other selected regions, as of April this year, the gas market is open. The impact will be dramatic.
In September last year, the regulator Ofgas reported that a quarter of consumers in the pilot areas had already defected from British Gas.
Typical savings offered by the alternative providers are around 15% compared to British Gas’ existing tariffs. The South Wales regional company, Swalec, has targeted businesses and households in Bristol and elsewhere with promises of 20% savings.
The two million small businesses users who are about to enter a competitive market for electricity will be the targets of a heavy marketing offensive by all of the major suppliers. On the face of it, it seems strange that electricity companies can sell gas cheaper than the former national supplier, while British Gas can offer savings on electricity.
Factors other than price
One reason, according to London Electricity’s head of marketing for business customers, Tony Galloni, is the economies of scale when the same supplier can bill customers for both gas and electricity.
‘Business customers, even small businesses, will be looking at savings when it comes to a combined offer. Also, deregulation has driven out some of the costs of the utilities,’ he says.
Whether the incentive to switch supplier will remain in the long term is a different matter. The experience of deregulation for larger business customers in 1994, when the threshold for entering the competitive market was reduced from 1 megawatt to 100 kilowatts, was that sharp differentials between different suppliers eventually narrowed as the market stabilised.
The lesson, according to Galloni, is that buyers should look at other factors as well as price alone. One important issue is how the supplier can tailor its package for a business with more than one site.
Multi-site businesses stand to gain substantially, especially if their individual sites all come below the 100kw level. In the new market they will be able to negotiate one deal for all of their sites, even if they are in different parts of the country. Galloni says: ‘The different sites could be on different tariffs, in different regional electricity companies’ areas and their suppliers could enter the competitive market at different times. We are already talking to people about how we are able to deal with those issues.’
The person responsible for buying energy – typically the finance manager in a small business – will need to be aware of the needs and usage of the different sites, and their average consumption.
Comparing like with like is not always easy, given the range of different tariffs. For example, a tariff which favours users with high demand during normal office hours cannot easily be compared with one tailored to heavy off-peak use.
Customers will also need to decide how much help and advice they want from the supplier and whether new facilities, such as electronic billing and payment systems, would represent an advantage.
Galloni says: ‘Buyers need to meet with potential suppliers and explain where their sites are, and their size and patterns of consumption. They need to say what they want from their electricity suppliers and how they want it delivered.’
For customers switching suppliers, the transition period can cause problems, warns Sue Slipman, director of the Gas Consumers Council. ‘Delays can result in huge expense, particularly when the old contract has expired.
Many suppliers cease to offer the old contract rate once the contract expires. They can insist on a much higher rate, even when they are continuing to supply the customer for a long period.’
But switching can save money, and not just in simple price terms. Phil Taylor, electricity sales manager for Eastern Electricity, says: ‘My advice to people with responsibility for buying electricity is not to focus on price alone, but to adopt a long-term contract approach. This practice already pays dividends to many businesses in the 100kw electricity market.’
Electricity may be a commodity, but concentrating on the cheapest price may prove to be a false economy. Taylor points out: ‘Planning energy savings by working with energy suppliers can produce savings well into the future.’
Eastern’s business development team service offers a detailed audit of an organisation’s energy consumption to provide a snapshot of its performance and highlight any areas which need improvement. The team can provide an on-line bulletin board service, which can run on a PC supporting Windows or DOS, to provide up-to-date information on usage and pricing.
The aim is to allow customers to be their own energy analyst. Eastern’s philosophy is that ‘energy wastage is a strong indicator of inefficiencies elsewhere in the business,’ so there may be other advantages as well as lower fuel bills.
Midlands Electricity’s Powerline service is another example of adding consultancy services to a commodity. Through Powerline, MEB provides help with energy savings, from advice to the installation of new plant.
Lotus, one of the most famous names in motor racing, is one example.
Under the Powerline agreement, MEB Midlands Gas provided a 2km gas pipeline to Lotus’ site outside Norwich so that the existing oil heating system could be replaced with gas. The contract not only includes the supply, installation, operation and maintenance of process heating equipment, but also the project’s #670,000 capital costs, which will be spread over the next ten years.
Lotus site manager John Bourne says: ‘We had looked at converting to North Sea gas ourselves, but we couldn’t justify the capital costs. The Powerline offer provided us with an obvious solution and a cost-effective alternative.’
The new installation also includes a building energy management system, to identify energy use by different departments. Upgrading heating systems isn’t the only way to save money, though. Norpak Food Services, a chilled and frozen-food distributor based in Staffordshire, achieved energy cost-savings of 20%, thanks to MEB’s electricity price forecast service.
Know your company usage
Based on the forecast for prices for each half-hour period in the day ahead, the refrigeration units for Norpak’s one million cubic feet of cold storage have been programmed to switch off when the prices are highest and back on again when they are low. The system also meets Norpak’s obligation to record store temperatures, and ensures they do not rise above -25 degrees centigrade.
Even businesses which are much smaller than Lotus or Norpak need to decide which tariff is right for their typical usage. Yorkshire Electricity, for example, offers a range of special tariffs in addition to its general quarterly tariff, which is aimed at the typical business with peak consumption between 9.00am and 5.30pm. Supermarkets, freezer centres or other businesses with equipment running through the night, could benefit from the Economy 7 Quarterly tariff. Nightclubs, bars and other businesses with peak demand in the evenings and weekends would save more on the Weekend Economy 7 tariff.
Some of the marketing methods employed by suppliers or their agents in the drive to recruit domestic customers in the newly liberalised gas market have come in for heavy criticism. In March this year, an expose by World in Action turned up horror stories of door-to-door salespeople using misleading or dishonest tactics to win customers.
In one case, a Hartlepool woman was told that her husband had signed a contract to switch to Beacon Gas – it was a forgery, signed 15 months after his death. In that case, the salesman was dismissed shortly afterwards, but the pressure to earn a commission is high, especially for some of the sales agencies working in this field.
Watch out for the hard sell
One interviewee in Leigh, Lancashire, told World in Action that she had been stopped in the street and asked to sign a document which she thought was to confirm her interest in finding out more. It turned out to be a legally binding contract. The same salesman persuaded a newsagent to sign a contract using the same trick – even though the shop did not have a gas supply.
Energy minister John Battle has warned that ‘abuses will not be tolerated’, and Ofgas, has now moved to include a condition in the gas suppliers’ licences that their marketing practices must follow strict guidelines. OFFER is consulting on a similar clause for the electricity industry. Ofgas has already forced Northern Electricity to change its sales agency and Eastern Group was cleared of sharp practice last week.
Perhaps not many small businesses will be as naive as the Lancashire newsagent but, just as in the domestic market, they will be the targets for a very hard sell. As ever, canny customers will read the small print and ask tough questions. Above all, though, they will need to have a very a clear idea of the needs of their own business if they are to reap the rewards of the deregulated market.
Rob Outram is a freelance journalist
SCHEDULE FOR ELECTRICITY DEREGULATION
Gas deregulation followed a ‘big bang’ approach with all customers in a given region able to choose a supplier from day one. In the electricity market, though, liberalisation is to be phased in.
Deregulation of electricity was originally planned for April, but the regulator – Professor Stephen Littlechild of OFFER, the office of electricity regulation – was concerned that integration of the different providers’ computer systems was not far enough advanced to open up the market by that date.
IT systems dictate scheduling
In each region, an initial 10% of customers identified by postcode, plus those business customers with demand close to the previous 2,500 therm threshold, will be able to choose a supplier.
Thirteen weeks later, a further third of domestic customers and all business customers will have access to the market.
After another 13 weeks, all customers will be able to switch suppliers.
This apparently tortuous approach, according to an OFFER spokesman, is to ensure that the IT systems do not overload and crash at the outset.
Changes to come in the autumn
This September, the first four regions – Manweb in the North-West, Yorkshire Electricity, Seeboard in the South-East, and Eastern Electricity – will be the first companies to be deregulated.
In October, Scottish Power, Scottish Hydro, Northern Electric and Midlands Electric join the market.
Finally, in December, the remaining regions will be deregulated, bringing in the customers of Norweb, Swalec, Sweb (the South-West’s provider), London Electricity, East Midlands Electricity and Southern Electricity.
All of these companies, plus British Gas, will compete to sell electricity to domestic and small business customers, and in future other businesses, such as supermarket chains and insurance companies, may want to get in on the act.
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