New regulations give tenants the right to choose electricity and gas suppliers

Date: 31/01/12

Key points

• Under the Electricity and Gas (Internal Markets) Regulations 2011 (“the Regulations”) most tenants will have the right to ask their landlords to allow a competitor electricity supplier to distribute electricity to them directly via the cables and electricity system in the building.
• If there are several tenants in the building, each could ask for a different supplier instead of that chosen by the landlord.
• The change could enable tenants to take advantage of cheaper energy prices but will also have cost implications for the tenant - the tenant will usually bear the cost of establishing access for the alternative supplier.
• The Regulations will have practical and administrative implications for the landlord.  They will only have limited rights to refuse the request and will have to liaise with the third party supplier in order to facilitate the change.

What changes will the Regulations bring about?

The current position is that a landlord will often choose the electricity supplier for a building as a whole and negotiate the terms of the supply.  The “bulk buying” of the electricity can ensure favourable prices but the landlord might need to guarantee consumption of a minimum quantity of electricity.  The landlord will usually recover the cost of the electricity through the service charge and may add a reasonable fee to cover his administration costs.  Only rarely will a tenant have its own direct supply of electricity and choose and pay the supplier directly.

Under the Regulations, the tenant can request consent to use an alternative supplier both for its own particular demise and for the common parts.  The landlord must respond to the request within 10 working days and can:

• Indicate that it will provide the third party supplier with the necessary information; or
• Explain that it does not believe that the obligation to provide third party access applies.

The landlord can only argue that the obligation to provide third party access does not apply if he can show:

• The network does not have sufficient capacity and it is not technically feasible to increase it (or increasing it would have a significant adverse impact on the landlord or others); or
• The system in the building could not be defined as a “distribution system” (this is unlikely in a multilet building).

It should be noted that there is no minimum threshold applicable to these Regulations and so any multilet building, no matter how small, can fall within them.

Tariffs for use of the distribution system

Under the Regulations the landlord can charge the tenant a tariff for using the distribution system.  These tariffs must be approved by Ofgem.  Almost all landlords that intend to charge a tariff must seek Ofgem approval of the methodology applied in calculating it.  It is thought, however, that if the landlord uses the methodology proposed by Ofgem they will not need to seek specific approval.  Confirmation of this is expected when Ofgem issues their guidance shortly.

Why have the Regulations been created?

The Regulations have been created in response to the Citiworks ruling handed down by the European Court of Justice in 2008, which determined that a non-discriminatory, transparent and fairly priced network access was necessary for competition to function.  A fully open market could be achieved when consumers could freely choose their suppliers and suppliers could freely deliver to their customers.  Allowing third party access was thought to be a key way of achieving this.  In addition, it is hoped that the increased competition will drive energy prices down.  Prior to the Regulations, the landlord could effectively operate a monopoly electricity network within each multilet building.

What must you do?

If you are a landlord you do not have to take any action immediately.  You could just wait to see if your tenants make a request for third party access.  You may, however, consider:

• Improving the terms of your existing supply.  It might be advisable to check whether your current supplier is providing you with the best deal available.  If the current package is competitive, then your tenants will have less incentive to apply for third party access.
• Assess what is involved in providing third party access.  The cost can be passed to the tenant (or in some cases the third party supplier) but you may be able to respond to your tenant more quickly if you have some idea in advance of the potential costs and practicalities.
• Consider how you will deal with the ongoing administration of billing and metering (in some cases) if third party access is allowed.
• Assess the impact that third party access could have on your existing arrangement with your electricity supplier.  Will the building still be able to meet the minimum consumption figures if some tenants switch and others do not?
• Are you going to charge for use of the distribution system?  If so, what methodology will you use to calculate the tariffs?  Will you require specific Ofgem approval?

 If you are a tenant consider:

• Could you get a better deal through third party access?  You are entitled to request the full details of your current electricity supply from your landlord.  Remember to ask whether the landlord will be charging for use of the distribution system.
• If you are not getting the best deal, should you ask for third party access or request that your landlord switch suppliers for the whole building?
• If you believe that third party access is the best option, assess the costs of installing the necessary equipment.  Will the reduced electricity costs cover the installation costs?  If so, how quickly? 

It will be interesting to see whether tenants exercise their rights under these Regulations.  The idea of choosing a supplier and controlling costs may be appealing but it could be that tenants will decide to continue as they are at present rather than incur the initial costs of changing.  In the long run, the Regulations may well have the desired effect and open up competition for utilities – or at least ensure that landlords charge competitive amounts to their tenants.

For more information please do not hesitate to contact Emma Hill on 0161 604 1544 or email emma.hill@dwf.co.uk