Communal Energy: Why it’s even more important to agree a competitive contract

If you live in a residential block and pay a service charge bill for communal electricity and gas supplies, you may be unaware that your choice of supplier can be limited by both the payment method used to pay the bills and the credit perception of the contracting party.

More and more utility suppliers simply do not offer competitive prices to customers paying by BACS or cheque and with direct debit rarely being a permitted option for block managing agents, options can be limited.

Many RTM companies and freeholders have unknown or ‘non-trading’ statuses held with the commercial credit agencies which the utility providers use to score potential customers. As a result, many utility providers have a simplistic approach to credit scores and thus seek to apply additional premiums or security deposits as well as offer higher, less competitive tariffs.

This has always been a problem area for managing agents, who if not able to circumnavigate these issues, are then not able to access competitive tariffs and optimise savings on their block’s communal utility spend.

However, it is all about to change – and not for the better.

Why? Two words: Heat Networks

Before Heat Networks, a communal gas supply might be limited to areas such as corridors, the reception area and the leisure suite. However, in a building with a heat network, a communal supply will also provide heat and hot water inside residents’ homes.

A communal gas supply in a block without a heat network may consume a small number of kWh’s per year, and if not on the best value tariff may only result in a few hundred pounds lost.

Conversely, a communal supply block with a Heat Network will consume gigantic volumes by comparison. Therefore, by not securing a competitive contract, the savings lost are significant and could result in thousands of pounds spent unnecessarily.

In essence, an issue that once raised eyebrows from residents when reviewing their service charge, becomes a hot topic of contention fuelled (did you see what I did there) by monthly resident invoicing.

Heat Network residents will typically receive monthly invoicing from the RTM or freeholder for their share of the communal supply. Consequently, they will be aware of the tariff negotiated and how that compares with the open market.

Last month at Ginger Energy we confronted this very issue. We were appointed to look after a block of 20 apartments that had not been on the best value tariff because of the limitations mentioned above. As such, the residents receiving high-value monthly invoices were very concerned about what they had signed up for by living in a block with a heat network.

As soon as the contract ended, we were able to secure a new communal gas contract which resulted in an annual saving of 14k. Residents saw immediate benefits when their monthly invoices reduced accordingly.

Imagine the savings that can be achieved on a 200+ property, or money wasted, if the communal supply is not on a competitive tariff.

In a block that does not have a heat network residents will pay for and choose their own utility provider. However, residents living in a block that is supplied by a heat network will pay the freeholder or RMT for heat and hot water and have no way of changing providers. In our experience all too often the residents are not aware of the implications of living in a heat network block when signing their lease agreements.

In effect, the RMT and freeholder have a monopoly on supply. As such, it’s imperative they act in the best interest of their residents. The contracts with the utility providers must be treated as a priority and kept as low as possible to ensure the relationship between residents, RTM companies/ freeholders and their appointed managing agents are kept harmonious.

In Ginger Energy’s experience, blocks have high tariffs for one of two reasons. Either freeholders, RTM or managing agents have not been able to circumnavigate the industry “blockers”, or they lack understanding of how important it is to ensure the main supplier contract is fit for purpose and offers the best value.

There are currently about 14k heat networks delivering supply to half a million customers in the UK. It is predicted that 5 million homes (24% of residential heat demand) will have heat supplied by heat networks by 2050, suggesting this is an issue that isn’t going to go away by itself. Managing agents, freeholders or RTM companies, who inadvertently find themselves managing a site with a heat network have to ensure significant funds are available to pay the mains supply. Given the fact that heat network charges from residents are based on measured consumption, this can delay receipts and can even risk de-energisation of the mains supply! That is a whole different topic for another day…

So what is the solution?

If payment can be made by direct debit, this is usually sufficient to gain access to prices across the whole market, even if a credit score is unknown. Regular meter readings and a smart metering solution roll-out project is essential to reduce the reliance on Sally the concierge taking monthly meter readings. This way you know exactly what the spend is rather than relying on estimates.

Contract terms over the traditional 12 month period are also beneficial so it might be worth considering a section 20 consultation as often, subject to market conditions, contracts can be more competitive over a longer-term.

Another possible solution is for a managing agent or broker to assume legal responsibility for the supply contract. However, this itself can present a problem if changing managing agents or brokers will void an existing contract – which is a problem in a rising market. Additionally, this action will almost certainly add in a risk premium which we have seen in extreme cases when the providers have refused to offer contracts to consumers with a poor credit rating.

Are there other options?

We recommend properties with a heat network to operate a bond system so that funds are received and can be used as cash flow or a deposit. Consider that each month the managing agent will have to find sufficient funds to pay the mains incoming supply invoice and then to wait for 100% of their tenants to pay the bills to cover the cost. The reality is that not all tenants will pay in time and some not at all, so a bond scheme can be really helpful to ensure there is enough money to pay the mains provider.

Aside from ensuring there is no risk to supply, at contract renewal time the existing provider may look more favourably on a consumer that has paid on time.

For help with any of the above issues, to review your utility costs, or for general advice with any other supplier issue, please do not hesitate to contact us using the form below.