Energy forecasts prove to be excessive, but is this reflected in your budget?

Energy forecasts prove to be excessive, but is this reflected in your budget?

Many occupiers have been bracing themselves for significant increases in energy costs in 2023 in respect of both demised (direct) consumption and electricity and gas costs associated with landlord’s plant and common areas, recovered via the service charge.

Many will also have the added burden of excess energy costs in 2022 to bear, once service charge accounts are reconciled, the extent of which will depend upon the accuracy of the service charge budget and supply contract renewal dates.

However, what has become apparent is that some landlords and managing agents have over-budgeted for energy.  The extent to which this may have occurred will depend upon a number of factors:

  • Accounting period – budgeting normally begins several months before the start of the year.  For budgets based on the calendar year in particular and especially where supply contract renewal dates fell in October, it may have been difficult to reliably forecast energy costs.  If the budgets were being set relatively early, then details of the Government’s Energy Bill Relief Scheme may not have been clear, and the relief won’t have been accounted for.
  • Already mentioned, but it is common within the industry for supply contracts to run from either April or October, meaning that they will expire part way through 2023 if a 12-month contract was agreed.  Accurately forecasting what the rates might be at renewal would have been a challenge.
  • Energy saving – the scope for some landlords and tenants to make material savings in this regard could be limited, but it is likely that many will step up a gear in their efforts to reduce energy consumption.

These factors and others could have resulted in budgets being set too high.  It is doubtful that many would have predicted that electricity costs would be down to 30-35p per kWh by April 2023, if they were asked to make a prediction in October last year.  Assure have also come across cases where the Energy Bill Relief Scheme had not been accounted for, as the full details of the scheme were unavailable when the budget was being set.

Under such circumstances, it is not unreasonable to expect a landlord to review their energy costs, particularly at the point when the supply contracts are renewed, assess against consumption and costs to date and implement a budget reduction.  This could include the issuing of credits to occupiers where year to date costs are lower than budget and reducing on-account demands for the remainder of the year.

In respect of demised consumption, the same consideration should apply where this is demanded on an on-account basis with a year-end reconciliation.  Occupiers who’s consumption is billed based on sub-meter readings should see an immediate impact from any cost reductions.

In a year when occupiers are being impacted by significant extra costs due to inflation and wage increases, in addition to energy costs, it is not unreasonable to expect landlords to commit to regular reviews of expenditure, ideally on a quarterly basis but as a minimum at the mid-point of the year, and to offer reductions and refunds where there is scope for them to do so.

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