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Tuesday 10th of December 2019 | Posted In: Buy and Sell, Buying energy

Energy contracts: Your questions answered

Getting to grips with energy prices and suppliers can be challenging. This month, the contract team at NFU Energy share their expertise and answer some of the most common questions asked by NFU members.

Why do unit rates still go up when the wholesale electricity price falls?

The wholesale cost of electricity makes up only about a third of the unit rate on your bill. The remaining two-thirds is made up of network costs, environmental and social obligations costs, supplier operating costs, and taxes. As the energy industry and infrastructure continues to change and drive towards cleaner energy these costs tend to increase year-on-year which is what takes the unit rates up overall, irrespective of the underlying wholesale price.

It’s time to renew my contract, should I fix short term or long term?

Although you might think that committing to a long-term fixed-price contract when the market is high has a greater risk than a short-term contract, that’s not always the case.

The overall trend in the past three years has been for wholesale energy prices to increase by around 10-15% annually and third-party costs have also risen steadily. If unit prices continue to increase, re-fixing at a new price each year could cost you more over time than going for a long-term, fully fixed contract at an initial slightly higher price.

“Don’t be afraid of fixing longer term as it may prove to be financially beneficial and could give you some security in a rising market. Avoid leaving things to the last minute and look at prices at least three to four months ahead of your renewal date to give yourself time to consider your options. If you already have a supplier quote, just call us if you’d like an independent check or comparison.”

Jodie Hisgett, Contract Sales Manager, NFU Energy

Points to consider:

  • The time it takes you to arrange your contract if you renew, for example, every year vs every three or four years.
  • The longer you lock in for, the longer you avoid increases in third party costs if you’re in a fully fixed and inclusive contract.
  • Long term means you have price certainty, so will be able to budget more easily based on expected usage.
  • Yes, there is always a chance that the wholesale price could come down if you fix long term but do remember it only accounts for about a third of your bill.

Now that Ofgem has introduced the price cap, does it make sense to just stick with my current supplier?

If you’re on a variable tariff you’re likely to have a new lower rate now that many of the larger suppliers have introduced energy price caps on their standard variable tariffs. But don’t let this fool you into complacency. It’s still likely that a new fixed price contract with a different supplier will give you a better price along with the budget certainty that comes with it.

I’m being offered a really good price by a small supplier, but are they at risk of folding?

You are right to be wary. Smaller suppliers often offer very low unit prices when they’re starting out, but this can mean that they haven’t accounted accurately for third party costs. If they then get an unexpectedly high third party bill, they’ll either add this to your rates mid-contract or find it’s simply too big a cost to absorb and they may fold.

Low prices can also indicate low customer service costs, which mean the service team may simply not have the time or expertise to resolve customer issues. This can result in fines or embargos from Ofgem which may stop them from taking on new supplies and leave them in financial difficulty.

To discuss your energy contract renewal, including the benefits of joining our NFU Electricity Buying Group, call the NFU Energy contracts team on 024 7669 8885. Plus, keep up to date with other energy related news at www.nfuenergy.co.uk.