Is there a better energy deal for our smallest businesses?

Domestic energy prices are rarely out of the news at the moment — but we generally hear less about the fact that businesses are also facing rising costs. Some data shows their prices almost tripling within a year. As the official energy consumer body, our main focus at Citizens Advice is on getting more support for domestic customers — but we also have a remit to work to improve the market for micro-businesses.

Micro-businesses are the smallest businesses, normally with fewer than 10 employees, for whom the energy market can be challenging. They often lack specialist energy knowledge, but their contracts operate differently to those for domestic customers, and they have fewer protections. To look at these issues Ofgem launched a review in 2019, and has now published the final reforms it will make to improve the way the market operates. But do they go far enough?

Buying energy is more complex for microbusinesses

Unlike for domestic customers, there is no energy price cap. This means it’s even more important for microbusinesses to ensure they can buy energy at a good price. But the market is complicated. Pricing is based on the individual company and contracts may run for multi-year periods. Some businesses are on variable or deemed tariffs that track the wholesale price.

To help manage this complexity, many businesses use a broker to help buy their energy. Our research has shown that while the majority of customers have a good experience with brokers, a significant minority don’t. This can be due to pressure sales and a lack of clarity over the value of the brokers service. Brokers are not directly regulated, so if things go wrong microbusinesses can’t always get their problems resolved easily. There’s also no cooling off period for contracts, which can make it impossible to cancel.

Rose* moved into new business premises and was unsure of who the supplier was. A broker called on the business number and pretending to be a supplier offering a contract. Rose signed up to a 3 year contract and received an email stating the account was to go live. Rose said the prices on the tariff were too high, and wanted to leave the contract, but the supplier told her there is no cooling off period.

To tackle these issues Ofgem has decided that suppliers will only be able to work with brokers who are signed up with the Energy Ombudsman. This will mean customers can take unresolved complaints to the Ombudsman and get redress. Suppliers will also need to provide clearer information about contracts and broker commission.

Ofgem had proposed that it would give microbusinesses more rights to cancel a contract if they changed their mind. We support this idea, but were concerned by the design they put forward, as the rights would only have applied in limited circumstances, and left many without protection. We think microbusinesses should have access to a full 14 day cooling off period for all switches, like domestic customers.

Ofgem has now decided not to proceed with this change at this stage, and to revisit the idea once wider reforms to improve the switching process are implemented later this year. We’ll continue to argue for a plan to deliver this important protection in full.

Ofgem could do more to ensure suppliers support microbusinesses that fall behind on bills

Microbusinesses that fall behind on their bills have fewer protections. Payment plans are only offered if the supplier is willing, and customers who don’t pay can be disconnected, with high reconnection costs or security deposits required to get supply back. For people whose homes are attached to non-domestic premises — like living above a pub or shop — this can leave them without energy. Many customers aren’t aware of support, and so often delay asking for help until unmanageable debts have built up.

This lack of support was demonstrated by research we did jointly with Ofgem last year on microbusiness experiences with energy following the pandemic. The businesses we spoke to did not generally recall receiving any information about help that might be available from their supplier, and most didn’t expect to get help if they asked. Those that did seek help had largely negative experiences, for example being denied a payment reduction while trade was reduced or being unable to renew their contract as their usage was too low.

Matt* runs a barber shop and fell behind on his energy bills during the pandemic. He contacted the supplier to ask for a repayment plan but they refused. He also tried to switch suppliers, but this was blocked. He’s now had the electricity disconnected, which means he can’t serve customers and will leave his staff out of work.

Suppliers are obligated to treat microbusiness customers fairly, and as part of its review we called for Ofgem to be clearer on how it expected suppliers to interpret this for customers in debt. We also wanted clearer signposting on bills to third party support, so businesses could more easily find advice. We’re disappointed these proposals were not taken forward, but will work with Ofgem later this year to raise awareness of the consumer protections that are available.

Ofgem can’t protect microbusinesses from rising prices

These changes can’t address the most urgent challenges facing microbusinesses in relation to energy. Their energy costs are rising more quickly than for domestic customers, and small business organisations have called for urgent government support. Any support needs to account for the fact that different businesses and sectors may have very different needs:

• Energy will form a different proportion of a business’s costs depending on what products or services they provide
• Some businesses may be more able to pass on higher costs to their customers than others
• Different sectors may be less resilient, depending on factors like how they’ve been impacted by the pandemic and wider inflationary pressures

Some higher energy using businesses we spoke to in our research — like a local butchers in Scotland — had thrived with much higher sales since the pandemic. Others we spoke to, like a curtain makers in England, had struggled with supply chain issues and were kept going thanks to support like the furlough scheme. Different types of support might be appropriate based on the wider context for businesses and sectors. Options the Government could consider include changes to business taxes, a rebate through business rates, or incentives for investments that improve energy efficiency.

*Case studies are from contacts to the Citizens Advice consumer service helpline. All names have been changed. Our joint research with Ofgem will be published later this year.