In this article we look at how energy broker fees are applied, as well as the different levels of service you can expect from a broker. And why energy companies often pay worrying high levels of commission to unscrupulous ‘brokers’.
Unfortunately, the commercial energy market is not particularly well regulated. Especially regarding energy broker fees. Some brokers are clear and transparent with their business customers and explain the fees they are likely to receive.
However, we hear several stories a week from business owners who have received a highly pressurised sales call and realise they have been ‘stitched up’. Because the ‘broker’ has included a very large increment in the unit rate. These are energy broker fees agreed with your energy supplier.
Note: At Perfect Clarity, we don’t cold call businesses. And limit our commission from energy companies. Completely transparent, we tell you what our expected commission will be.
How do energy broker fees work?
The majority of energy contracts arranged by a broker will include the energy broker fee, or commission, in the price you pay per kWh for gas or electricity.
The broker themselves will set this in agreement with the energy supplier. Energy suppliers can allow brokers to set very high levels of commission, and this increases the price per kWh on your energy contract. Broker commission usually starts at 0.05p per kWh. And are usually capped at 1p or 2p per kWh by many energy suppliers.
Note: At Perfect Clarity, our commission is between 0.05p – 0.40p per kWh. Although for very small supplies, it may be a little higher than this. These commission levels are confirmed in our terms and conditions.
Some brokers T&Cs explain how they receive their commission, but the energy broker fees you pay indirectly (through your bills) won’t actually be clear. They may not tell you what they earn for your specific contract. Unless you ask them, and even then, some brokers will delay or refuse to acknowledge this. Which speaks volumes in itself.
Note: When we send you our options for your gas or electricity contract, we make it clear what our expected commission will be. Extremely few energy brokers will do this.
Energy comparison websites
The same fee structure is also applied by comparison sites. They are also energy brokers. You will be familiar with these sites and may have used them for your domestic energy. Again, the T&Cs may explain how they earn their fees. But you will need to put in a request to find out how much this actually is.
It is only when you compare our energy prices with other brokers and/or comparison sites that you realise how much energy broker fees can vary.
Why do energy suppliers allow brokers to set such high commissions?
Let’s make the assumption that only unscrupulous brokers are going to charge anything approaching 1p or 2p per kWh for their services.
By allowing this level of commission to be applied to their own contracts, energy companies are surely encouraging these unscrupulous ‘brokers’ to operate and receive inflated fees.
Energy companies, of course, are competing against each other. Imagine if one energy company were to limit the commission a broker could add to their energy prices, perhaps to something reasonable like 0.4p per kWh.
What would happen then?
That supplier may well see a large number of contracts disappear to a competitor. This would only apply if those brokers are more interested in pushing through the highest commission they can, i.e. looking after themselves instead of working to get the best price for their customer.
Yes, sadly a lot of energy brokers are simply looking after themselves. To these people, your business energy consumption is just used to leverage more profit for themselves. They will push through whatever commission they think they can get away with.
And this is just the same as energy companies.
Energy companies will also push through higher prices wherever possible. To maximise their profits. This is particularly true for smaller businesses with a lower annual consumption.
The only way energy suppliers are going to increase profits is to increase the price they charge your business per kWh of gas or electricity used. In much the same way energy broker fees are applied. The difference between the price on your bills and what it costs them to provide this, is their profit.
Some suppliers will build in more profit than others. As will brokers.
Therefore, you should not only ‘shop around’ for gas and electricity prices from a range of suppliers, but energy brokers as well.
So why use an energy broker at all?
A good energy broker will be a valuable asset to your business.
Better prices for your contract
How? Energy suppliers calculate the contract offer they provide to a business for their energy supply. This includes the wholesale cost of gas or electricity at that moment, and other costs incurred from the Grid such as transmissions and distribution charges for using the gas pipes or electricity cables to transport the energy to your premises. Along with other non-commodity charges incurred. Then there are government taxes and levies on top of this.
And then there is the energy suppliers’ profit margin.
In our experience, energy companies simply don’t look after small and medium sized businesses. The prices they offer these businesses are significantly higher than the ‘base rate’. We know, we have access to their base rate (which includes their smaller profit margin).
However, for a small business that doesn’t use as much energy as a factory, for example, the energy supplier will usually look to increase their profit margin where possible. In the same way as an unscrupulous broker will add large increments to the price per kWh, so will your energy supplier.
This is where we come in.
A new customer will often call energy companies that we have quoted and be a little shocked to find our prices are lower from the same supplier. Because we hold energy suppliers to account.
A better range of options for your business or charity
A good energy broker will also have access to a range of different energy companies. Not just half a dozen.
Working with a wide range of suppliers means the broker can cater for most requirements. This could be a request for green electricity or gas. It could be a newly incorporated business that has a low credit score – a good broker will have access to suppliers with a lower credit threshold.
And of course, a wider range of suppliers means there is more potential for better prices. Providing they don’t add a silly commission.
Review all aspects of your energy supply
This can include checking the VAT rate if you are a charity. Checking the agreed Capacity level if you have half hourly metering (ensuring you aren’t paying for more capacity than you need and aren’t paying excess charges either). And other aspects too.
When something goes wrong
A good energy broker will be worth their weight in gold when something goes wrong. This could be a mistake by your energy supplier, a billing error, a faulty meter, or another problem that may have arisen.
A lot of brokers, and certainly all comparison sites, just arrange a contract. Once they have pocketed their commission, they simply aren’t interested. Although you can be sure they will be in touch to arrange the next contract for you. Or auto-renew you without your knowledge (see Letter of Authority below).
A good broker will roll their sleeves up and get stuck in. They will resolve your issue with the energy company on your behalf, and keep you updated along the way.
Did you hear from your broker during the first lockdown in 2020? A good broker will have been in touch to see if they could help. Perhaps suggest reducing your monthly Direct Debit payments to energy suppliers if the premises were temporarily closed.
Letters of authority
A good broker will only use a Level 1 letter of authority, unless expressly agreed and made very clear to a customer that they are signing a Level 2 version – and what this means for the business owner.
Importantly, a Level 2 letter of authority allows your broker to sign off contracts on your behalf. And they don’t even have to inform you what price they have agreed on your behalf.
This sounds shocking, but it is true. Even more shockingly, Ofgem have not yet banned these. Some energy companies have decided not to accept contracts signed by a broker or third party. Which is progress, no doubt brought about by a myriad of complaints from customers who have unwittingly been on the receiving end of these.
A very well known comparison website offers a ‘DIY’ renewal service. This is in effect a Level 2 letter of authority. We have heard numerous incidents where they have renewed a business’ energy contract without their knowledge. As it is in the terms and conditions, there is nothing the business owner can do. Even though the prices are clearly nothing like the best on the market. Another case of an unscrupulous (and well-known) ‘broker’ adding huge commissions to the unit rate.
You can read more about Level 1 and Level 2 letters of authority in this article.
The situation with inflated fees has become so out of hand, that Ofgem are finally stepping in. Not before time. In 2020 they announced a consultation period to review the micro business energy market. They should present the results of these during 2021.
Given one of the proposals was to outline broker fees on customers’ bills, there could be a lot of shocked business owners later this year.
Talking with some energy companies, it does sound like a number of ‘brokers’ have actually left the energy market altogether during 2020. This could be to pressure on their business from the pandemic. It could also be due to the new input from Ofgem.