Energy groups tap into idea of year-long deals

Lengthy contracts for fuel could soon become the norm, but who benefits, asks Esther Shaw

We think nothing of committing to a 12-month contract when signing up for a mobile phone or broadband deal, but new rules mean that consumers can now be locked into a year-long contract with their energy supplier, too.

Last week, Utilita became the first UK energy provider to take advantage. It introduced a new 12-month contract for customers, prompting concerns that longer-term contracts could soon become the norm across the energy sector.

While an extended contract may look appealing – taking away, as it does, the uncertainty of price hikes during the contract period – there are fears that it could restrict customer choice.

Utilita's move comes less than a month after the energy regulator, Ofgem, announced that it was abolishing the current rules that force suppliers to give customers the right to switch without penalty after 28 days.

Utilita, which re-entered the market in February, says that it thought carefully about launching the 12-month contracts, and that the contracts will allow them to offer consumers a more competitive rate in a transparent way. It has confirmed that if it does increase its prices during a fixed-term contract, customers will not be locked in, and will be able to move to a cheaper deal.

Price comparison and switching companies have, unsurprisingly, been up in arms. They fear that Ofgem's announcement means fewer customers will switch energy suppliers.

But Ofgem said last month that it hoped the change in regulations would have a positive effect by encouraging providers to "offer more innovative products that could bring better deals to customers and environmental benefits".

Utilita insists that this is exactly what it is doing by introducing the year-long contracts. "We are in the business of developing a low-carbon economy and want to provide our customers with energy-efficient products and services, such as smart meters," says David Casale, Utilita chief executive. "It is not easy to persuade people to introduce these measures themselves, so we need to pay for these through our ongoing relationship with our customers." He points out that if customers can switch to a rival provider after 28 days, it becomes too expensive to invest in them. "In the short term, customers have longer-term contracts, but in the medium to long term this means more innovation and more energy efficiency."

For example, Utilita customers who stay for a year get a 7.5 per cent " loyalty bonus" rebate on their account. The supplier already operates a scheme that rewards customers who cut their energy usage with "Planet Points" that can be exchanged for products such as energy-saving light bulbs.

The consumer group Energywatch says Utilita itself is not the problem, as it is a small provider with only around 5,000 customers. It says the regulation change will only become a problem if the "Big Six" energy suppliers start tying customers into long-term contracts.

"Ofgem made its decision to allow innovation in the market," says Adam Scorer, Energywatch campaigns director. "Utilita is doing just that, by encouraging customers to install energy efficient measures such as smart meters. There are no signs yet that the Big Six will follow suit, but if they do abuse the move by Ofgem and tie everyone in, this will kill competition and the ability to switch."

Price comparison services share this concern. "Utilita's move could open the floodgates for other providers to impose long-term contracts," says Scott Byrom from Moneysupermarket.com. "I'd urge them not to, as this will be detrimental to the consumer, who is likely to see healthy and aggressive competition in the marketplace disappear, replaced by lock-ins and suppliers sitting pretty on long-term deals."

Karen Darby of Simply Switch adds that in other industries – such as mobile phones – contracts of 18 months and more are commonplace. "If this happens, competition in the energy market will suffer, and Ofgem may need to re-evaluate its plans," she says.

Tim Wolfenden from the switching service Uswitch.com adds that when Utilita first entered the market two years ago, "it seemed to be the innovator in offering extended energy contract terms.

"But the second time around, after re-entering the market earlier this year, its offering seems to be lacking in substance and real customer value," he says. "The removal of the 28-day rule was not designed for opportunistic suppliers to market long-term contracts with little or no perceived benefits."

He urges consumers to squeeze as much value out of their energy suppliers as possible. "If you are being asked to sign up for a compulsory 12 months, check there is something extra in it for you," he says.

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