Energy brokers are a key link in the chain between energy suppliers and clients who may not necessarily have the in-house expertise to deal with procurement and other key energy-related services themselves.
As the name suggests, brokerage describes the commission that is paid by the supplier to the energy broker in return for the services of introducing a client. Depending on the agreement and length of contract, suppliers can pay a broker £millions over the term of the contract.
Brokerage fees are calculated on the client’s energy use multiplied by an agreed uplift in cost per kWh and are normally paid monthly in arrears, where the client’s energy consumption is an actual read. However, in recent years, suppliers have enticed brokers to choose them over others by paying up to 80% of the fees upfront on the whole contract period.
Mind the gap
This “lump sum” payment of commission fees is based on an estimate of the client’s consumption over the contract period. Now this is fine if the client uses the full estimated quantity of energy or even exceeds it; however, issues arise when the client doesn’t consume the estimated level of energy – as during the lockdown period, but the broker has been paid the forward commission as if they have.
In this scenario, the suppliers will then trigger a “claw-back” clause requesting commission fees be returned to them, to account for the difference. This will, and often does, put a financial strain on the broker and, as seen in recent years, is a contributing factor for placing some of the larger UK brokerages into liquidation.
So how will the Covid-19 situation affect those brokerages that operate predominantly within the leisure, hospitality, and other industry sectors that have not been operational, or have been operating under a vastly reduced capacity, during the past three months and are still unsure when they will get back to normal?
What we do know is that energy consumption has almost dropped to zero within certain sectors of industry which, in turn, will proportionally reduce the commission payments made by suppliers.
What we don’t know is how many businesses will cease trading altogether before the end of their supply contract. This will impact massively on a broker as any forward payments will have to be returned.
The combination of these two circumstances will place massive financial strain on many of the UK energy brokerages.
What can be done?
Initially, the broker needs analyse the financial impact of Covid-19 and put a strategy in place. In some cases, time may be in short supply and the only alternative is the sell the business.
At Industrial Mergers and Acquisitions Ltd, we specialise in the selling and purchasing of energy companies and have a number of consultants on hand to assist you if you are looking to sell.
If you would like to have an informal discussion, please contact Steve Retford, on 07738 398045 or email me at email@example.com