What is a Blend and Extend Energy Contract?
A Blend and Extend contract is a type of business energy contract that allows you to extend your current contract length with reduced rates. These contracts exist as they help customers on fixed price contracts who may be paying higher rates take advantage of a drop in market prices.
How does Blend and Extend work?
- You realise your energy usage is lower than expected, or the market rates have dramatically dropped.
- Re-negotiating a contract with a lower fixed rate, or lower energy usage. The rates on your current contract are blended with the new current market rate to give you a new reduced price. You won’t be offered the current low market rate. These new rates are fixed.
- Your contract is extended, usually by 12 or 24 months on top of the length you already had left.
- You start paying the new rights straight away.
Due to staying with the same energy supplier, you are likely to be granted these discounted prices for this extension. Both parties benefit as you receive a cost saving and the energy supplier receives your business for a longer period of time.
Blend and extend contracts work best if you’re satisfied with your current supplier and mid-way through or close to the start of an inefficient contract due to unforeseen market drops or less energy being consumed.
There has been an increase in blend and extend contracts as many businesses have been worried about their energy costs since the Energy Bills Relief Scheme (EBRS) was replaced with the Energy Bills Discount Scheme (EBDS) in April 2023 and support was reduced. With many businesses in new deals signed during the height of the energy crisis, they have been working with their suppliers to try and find cost cutting solutions to keep their businesses afloat.
What Should I Consider Before Using Blend and Extend?
Before making a quick decision, we advise you to review the advantages and disadvantages of Blend and Extend:
Advantages
- Instant cost savings and relief on your energy bill
- New reduced price is fixed for a longer period of time which could protect you if the market prices increase in your new contract period
Disadvantages
- You will be contracted to your current supplier longer than you previously would have been, a disadvantage if you have a poor customer experience with them
- Your new contract length will be longer than a traditional new contract length with another supplier as you add 12-24 months on the existing length of the original contract
- Blend and Extend contracts merge your current fixed price with the current market rate, they do not match the current market rate and are therefore more expensive than a new energy contract, especially in the long run if the market rates continue to drop or stay lower than your new blended rate
Therefore, there are circumstances where the option to blend and extend may not be right for your business.
If you are in a position where you don’t urgently need to reduce costs, it might be best to wait until your existing contract ends. Instead you can secure your next contract with rates that give you the full market benefit. The only downside to this is that you’ll likely have to wait several months before you can take advantage of those prices.
If you find your business in a position where immediate cost savings would be worth furthering your contract with your existing supplier, a blend and extend contract can be a foolproof way to ensure you reap the benefits of a lower market price at no disadvantage to you or your supplier.
When deciding it’s best to calculate how much you’ll pay over the period of your current contract if you wait for this to expire, plus the new low market rate. Calculate this up to the length of the new potential blend and extended contract at it’s blended rate. This should help you make a decision on what is going to be more cost effective but remember your tolerance to risk and what forecasts there are for the market rates.
Why Blend and Extend?
Blend and extend works well for businesses that are in mid-value, fixed-price energy contracts (those who consume over a hundred thousand kilowatt hours to ten million kilowatt hours).
When markets are volatile you may end up on a contract with a higher fixed rate than the current market rate if prices drop. You are now being overcharged for your energy.
Alternatively, you may have agreed on a contract with a certain amount of minimum consumption, if you are consuming less than what you agreed you might have to pay more for the energy you now consume so that your supplier is not at a loss.
As business energy contracts cannot be terminated once agreed it is extremely important to choose the right contract. This is how you are potentially in a position where you need to now re-negotiate, or wait for your contract to expire which could be over a year.
Blend and extend contracts allow you to lower your costs as a trade-off for an extended contract (e.g. an extra year of business) with your current vendor.
In Summary – Benefits Include:
- Reduces and spreads energy costs when a contract was booked at a higher rate
- Improves budget planning
- Lower rates in the short term
- Great if you urgently need to reduce costs
Will my Current Supplier let me Blend and Extend?
Before you agree a fixed contract always check that a blend and extend clause exists in the contract. Even if it doesn’t an energy supplier may still be open to negotiations.
Even at a lower margin, energy suppliers benefit from extending a contract’s length because they maintain your business for a longer period (12-24 months).
The supplier is able to blend the existing fixed rate you are on with something closer to the market rate. However, be aware that they are usually not going to match the market rate as they already have you in contract at a higher price. The new deal you agree may not be the most competitive, but it will be an improvement on your existing deal.
