Long-term Business Gas and Electricity Contracts: Don’t Let Your Business be Lured by Fear of Further Price Increases

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Businesses are advised to leave behind their fears of further price increases in gas and electricity and resist the long-term fixed price contract with a view to gaining future advantage from a falling market. The major suppliers, who have already gained through massive retail price increases, are keen to keep the gravy train rolling. Don’t be caught out by scare mongering tactics.

As gas and electricity wholesale prices continue to tumble it’s highly questionable why many of the major suppliers are still actively encouraging small and medium sized businesses to sign up to longer term fixed price contracts, invariably set at a premium above their normal annual contract rates.

U.K. electricity wholesale prices rose to a peak this year due to a number of factors which have been widely cited – the dwindling North Sea gas reserves, the lack of gas storage capacity, the Zeebrugge-Bacton pipeline operating well below capacity, the fire at Centrica’s Rough storage plant, rising world oil prices and so on.

All of these things happening simultaneously culminated in a huge hike in the wholesale price of gas and electricity and there were real fears, if a little exaggerated, of whether or not U.K. inc. would survive last winter without major restrictions being placed on industry and commercial customers’ supplies.

Many business customers on fixed term electricity and gas contracts received their shocks with one massive increase, in some cases reaching as much as 140% where their previous contract had been fixed some five years before.

Hikes in retail gas and electricity prices followed in stages for domestic customers, the last of which will be implemented by Scottish and Southern Energy in January 2007.

Just how close the country was to meltdown remains unanswered. However, what is certain is a change in circumstances surrounding every one of the factors which led to the price hikes.

Oil prices have plummeted from their peak. Pressure has been placed on the Interconnector pipeline to raise its capacity. Rough storage is back to normal. Gas storage capacity has increased. There are even rumours of a new gas field discovery in the North Sea.

But perhaps most significant and immediate in driving down the wholesale price of gas and electricity has been the free flow of gas supplies through the new Langeled pipeline which has seen day ahead prices drop into negative territory.

With the exceptions of the gas field discovery and the falling oil prices it could be argued that the correction in all other factors were predictable and therefore ought not to have been fully loaded into recent retail price rises.

After all, most of the major retail suppliers are also involved in the generation and storage side of the industry and so would have had a good idea of the likely supply position in advance.

Whatever the case in favour of the huge price rises it cannot be denied that wholesale prices are now dropping, and dropping fast.

Graham Paul, Marketing Director of Electricity 4 Business, one of the U.K.s cheapest business electricity suppliers, claims “A rising market has traditionally been the driver of the fixed price longer term contract. When prices begin to fall, as happened in 2001, the accepted best practice is to wait until they have fallen to a level where you are confident that they can’t drop much further and only then is it advisable to fix a contract for as long a period as possible.”

With a contract which is due for renewal soon it is probably best to shop around for the best one year contract available and then seek to extend this once wholesale prices begin to stabilise.

It certainly doesn’t make sense, despite the scare mongering by major suppliers, to fix a long-term deal at peak prices created by short-term market fluctuations.

For those businesses who have already missed the deadline to avoid a rollover contract with their existing supplier and are obliged to renew at very high rates, beware the attraction of taking a longer term deal at a slightly lower rate as this will prove to be increasingly less attractive as retail gas and electricity rates begin to drop.

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