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For years, small firms have found themselves paying over the odds for their energy on the back of an uncompetitive market. Now, things are finally starting to change, as Peter Crush reveals
Confusing tariffs; an inability for customers to easily switch; contracts that unfairly tie users in for years; and price changes that aren’t passed on – these are just some of the high-profile judgements that energy regulator Ofgem has made against energy suppliers.
But while media attention has concentrated on the plight faced by ordinary households, small businesses have also suffered at the hands of the energy market for just as long, despite the average FSB member spending £4,243 a year on gas and electricity.
As early as 2011, Ofgem revealed it was becoming increasingly worried that small firms were receiving larger than necessary bills because of suppliers that, in its words, created “insufficient transparency regarding bill management, tariff rates and contract terms”.
In 2014, the regulator also criticised practices that automatically rolled over small business contracts without the users being informed or given the chance to cancel or look elsewhere. Even when firms did try to leave, Ofgem found that many had been locked into so-called ‘deemed’ tariff rates that were as much as 40 per cent more expensive.
“For far too long, the energy market for small firms has been like the Wild West,” says Nick Dwan, Director at Energy Scanner, a Compare-the-Market-style online price comparison service, launched to help small businesses in May. “Providers are engaged in practices that simply aren’t business customer-centric. We know of firms finding it hard to switch and being stalled when they want to switch; and our own research into deemed rates has shown some even worse rates – some 110 per cent higher than normally negotiated tariffs. Small businesses are, for want of a better word, being preyed on.”
Between 2014 and 2015, there was limited action on this problem. The first steps to real progress were not taken until the Competition and Markets Authority (CMA) intervened. The CMA calculated that between 2007 and 2014, the big six energy firms received £220 million more per year from SME customers than they would otherwise have done in a competitive market, of which £180 million came from microbusinesses.
So last year the CMA began a year-long investigation into the state of the energy market, to which FSB presented submissions. In June this year, its long-awaited recommendations were finally published.
The CMA re-confirmed that rollover tariff s continue to be too high – between 29 and 36 per cent higher than retention ones for electricity and 25-28 per cent higher for gas – and that small firms pay around 5 per cent more than what a better functioning market would allow.
One of the CMA’s key recommendations has been to insist that suppliers publish comparable tariff s for sole traders and microbusinesses (those with fewer than 10 staff) so that small firms can quickly compare energy prices – a long-standing FSB policy. The CMA argued that this measure is particularly needed because it found 45 per cent of microbusinesses were on default electricity tariffs – placed on a tariff that the owners hadn’t negotiated. For these microbusinesses, energy suppliers will also no longer be able to lock customers into expensive rollover contracts.
“We’ve worked hard in recent years to remind suppliers that business customers need the same protections as domestic customers, and the CMA’s investigation promotes this, too,” says Allen Creedy, Energy and Environment Policy Chair at FSB. “In response to lobbying by FSB and others, many of the larger suppliers had already been persuaded to end unfair auto-rollover contracts.”
However, there are areas where the CMA didn’t go far enough, he says. “We wanted tougher action on third-party intermediaries (TPIs), because there are still lots of cowboys out there,” he says.
“FSB, working with Ofgem, was a long way down the road designing TPI regulation, but these proposals were put on ice while the CMA investigation took place. But rather than make a specific ruling on this, the CMA referred it back to Ofgem to deal with, acknowledging the important work that had already been done by the regulator. We’re back to where we were several years ago.”
So can small businesses finally expect a brighter future? Much will depend on how the CMA’s proposed remedies are now implemented and how well suppliers engage with their small business customers. “Small firms feel disempowered,” says Mr Creedy. “They lack trust in the market and in their energy providers. Many simply don’t believe that the effort of engaging – and the precious time spent away from running their business – will be worth their while.”
It’s a view empathised with by FSB member Gary Lovatt who, two years ago, took over the running of a guest house in Keswick. “When you take over a business, you assume it’s been looked after, so like most people, I carried on with my existing supplier,” he recalls.
“There is lots of inertia around energy. It was only when they tried to tie me into a five-year contract that I had the impetus to look around.”
In fact, Mr Lovatt was among the first members to take advantage of FSB Energy – a service that FSB launched last November with Make It Cheaper – a third-party intermediary with 10 years’ experience in the energy comparison market – to demonstrate that small businesses can get a better deal. “I’ll be saving around £500 per year on a two-year deal, but even after a year I’ll be contacted to see if there are better offers elsewhere,” he says.
“I understand how time-scarce small firms are, and how energy can fall off their radar, but the fact remains that energy providers have, for a long time, taken advantage of them. So it’s time for us to redress this balance. Lots of £500 savings add up – that’s the message I think we need to convey.”
Further good news for small business owners is that the CMA has said it will create a database of small businesses that have been with the same energy provider for more than three years. Rival suppliers will then be able to access this list for new lead purposes, meaning no firm should be left with their current provider for more than three years without at least being marketed alternative – and cheaper – deals.
This arrangement, argues Nick Heath, Head of Communications at FSB Energy, should encourage more small firms to get into the habit of switching, and driving up their ‘engagement’ with their energy costs.
“It’s vital that businesses get used to seeing energy as part of the costs they need to control,” he says. “Domestic switching is up 27 per cent year-on-year, but we’re just not seeing this in the business market. This is down to lack of trust, and not believing TPIs when they tell you they’ve found the best deal. What the CMA has done, we hope, is to enable a better conversation.”
However, there’s one area FSB says it won’t stop pressing for – and it’s one that could be a much harder ask: moving energy conversations to be less about price.
“When you look at the CMA recommendations, their scope has really only been about the unit price of energy,” says Mr Creedy. “This in itself is welcome, but we want to move the market to a place where small businesses are empowered to understand their energy use, take advantage of new technologies and innovation, and reduce their usage and their costs.
“Small businesses are a hugely diverse group of customers that have very varied relationships with energy, in terms of how much they use or how empowered or motivated they are to make informed changes. Energy companies need to build up a much better understanding of their business customers, rather than treating them all as generic SMEs.” The introduction of smart metering should help in this respect, he adds.
In the meantime, at a time when all businesses say all costs matter, firms are being encouraged to do their bit to control their energy costs. “We achieve annual savings for small firms of £1,050 a year,” says Mr Heath. “Small businesses have been treated as cash cows by suppliers, but they can take back control. Switching doesn’t take as long as people think.”
You don’t need to be a rocket scientist to guess fish-and-chip shops guzzle energy. Until recently, Pete Richardson (pictured), owner of PK’s Fish and Chips in Twickenham, south-west London, was paying £350 a month in gas alone, and he still pays a further £250 a month for electricity – mainly because of having a chilled-drinks cabinet plugged in all day.
In short, energy is a huge cost to the business. “Our frying vats are like steel factories – once on, they need to stay on,” he says. “We could turn them down, but if a customer came in they’d have to wait 15 minutes before they got up to temperature.”
As with many small firms, though, he feels energy suppliers make it too complex to change. “When we opened seven years ago, we had to convert the premises to commercial use, and our current supplier was the only one that would put a new pipe in,” he says.
“That alone cost £5,000, and then we were locked into a multi-year deal.”
Although he knows he’s not on the best deal, he says he’s given up trying to move because he’s been presented with every obstacle in the book. “I’m working flat out, and it’s one extra thing that I don’t have time for,” he says.
“It may sound extreme, but we recently invested £60,000 buying more energy-efficient cooking equipment, and now our gas bill is only £200 a month.
“While we didn’t spend this just to save energy – the new vats break down less, are easier to clean, and don’t need as much maintenance – it’s been this, rather than switching, that has been the easiest way of saving money on my energy bills.”
As a member of the FSB, all your energy needs are covered.
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Expanding your business premises
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National Federation of Self Employed & Small Businesses LimitedSir Frank Whittle Way / Blackpool / FY4 2FE. National Federation of Self Employed & Small Businesses Limited (FSB) is registered in England, number 1263540