UK Energy Suppliers Under Pressure to Renegotiate Contracts with Small Businesses

UK Energy Suppliers Under Pressure to Renegotiate Contracts with Small Businesses

Federation of Small Businesses Urges UK Energy Suppliers to Renegotiate Contracts with Small Businesses

The Federation of Small Businesses has warned that thousands of UK companies could struggle to stay afloat if energy suppliers don't renegotiate fixed contracts with smaller businesses in reflection of the sharp drop in wholesale prices over recent months. The call for renegotiation comes after thousands of companies signed fixed contracts during the second half of last year, when energy prices were at their peak. However, wholesale natural gas prices have since fallen over 80%, and the government has reduced support for businesses since the end of the winter. Despite this, many companies are still stuck on higher-cost fixed deals.

The FSB is urging the UK government and energy regulator Ofgem to support a move towards “blend and extend” contracts, warning that if renegotiation does not occur, 93,000 businesses will face closure or cutbacks due to the size of their energy bills. According to the FSB, “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 into sky-high energy contracts.”

Although prices remain relatively high by historical standards, they have fallen sharply since last year's peak, with the wholesale price hitting a 22-month low on Friday at 80 pence a therm for delivery next month. Contracts for delivery in winter 2023/24 are higher but are still down to around £1 a therm.

Energy prices rocketed last year as Russia reduced natural gas supplies to Europe in response to the full-scale invasion of Ukraine. UK prices reached over £6 a therm in August 2022. Energy UK, the industry body, has stated that it is "in suppliers' interests to ensure their customers can afford their bills" and noted that many are already "offering to renegotiate and extend existing contracts where this is possible".

However, the industry body cautioned that energy suppliers had also often bought the energy in advance to hedge their exposure to the fixed-term contracts signed with businesses last year. "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."

The UK government said contract negotiations were "ultimately a matter for suppliers and their customers", but added that it was holding "regular discussions with them and Ofgem to ensure businesses get a fair deal". The government has spent £5.9bn to date, or £30mn a day, to shield businesses from up to half of their wholesale energy costs over the winter.

Ofgem said it could not "unpick private contracts", but it wanted "to see commercially sensible solutions that help non-domestic customers". It added that it had recently written to suppliers, asking them "to show flexibility". "We will continue to press suppliers on this, while we review the regulation of the non-domestic market more broadly," Ofgem stated.

The FSB said any company that signed a contract in the second half of last year should be allowed to renegotiate its energy supply contract if the price it was paying was higher than during the winter months when more generous government support was in place. The FSB's policy chair, Tina McKenzie, added: "Giving small firms a way out of last year's market peak rates will accelerate the progress to recovery."

Article by Financial Times