The Electricity and Gas (Internal Markets) Regulations 2011 came into force on 10 November 2011.

Under the Regulations, a tenant now has the right to request its landlord to allow a competitor electricity supplier to supply it with electricity, even if it is just one tenant of a multi-tenanted building. Landlords may, therefore, have to install additional infrastructure and may run into difficulties where they have a contract for a fixed term or fixed price with a supplier. In a multi-let building the Regulations could, of course, lead to supplies from a number of different companies.

Background

To date, landlords of multi-let buildings have typically chosen the electricity supplier and recharged tenants the cost of the supply of electricity they use, either through the service charge or by reference to actual consumption measured by check meters. Larger landlords have been able to bulk-purchase electricity supplies and in doing so obtain favourable prices by fixing the term or the price under the supply contract. In the past, tenants have had no right to demand a change of electricity supplier or for each tenant to have its own individual supply.

Unknowingly, landlords have benefited from exemption from requirements to hold supply and distribution licences and obligations to open up their electrical cabling system to other suppliers, even though this would be a “distribution system” for the purposes of electricity supply legislation. Now, as a result of a decision of the European Court of Justice and the coming into force of the Regulations, this has changed.

How will the Regulations work?

As a result of the Regulations, landlords may find they receive requests from one or more tenants to allow access to what, to date, have been private distribution systems so that they can receive electricity from a different supplier from that chosen by the landlord. On receipt of a request, a landlord has to confirm either that it will provide the tenant’s choice of supplier with the necessary information or explain why the right to choose does not apply. The most likely reasons for a landlord turning down a request are either that the cabling within the building does not have sufficient capacity and it is not feasible to increase it, or that to do so would have a substantial adverse economic impact on the landlord outweighing the benefits of the increase in capacity.

The landlord will need to obtain approval from Ofgem to any charges it will make to the electricity company and commence negotiations with that company about the practical and technical implications. Ofgem is expected to publish guidance on the setting of tariffs and it may therefore be that landlords do not have to seek approval from Ofgem so long as they comply with the guidance.

Who pays and what are the benefits?

The cost of the physical work required to change the electrical cabling system will fall to the tenant, which includes any additional cabling to be installed. However, the landlord will be under a duty to co-operate and allow access to the electricity company for any necessary works.

It remains to be seen whether tenants will exercise these new rights. Perhaps for those larger organisations able to use bulk purchasing power, there is more benefit to be had from implementing the Regulations. Some may be able to satisfy an internal green agenda by choosing an alternative supplier. However, for others, the additional costs to modify the electrical cabling systems and ongoing charges may make this a less attractive proposition in practice than it sounds.

What should landlords do?

Strictly, landlords do not need to do anything unless and until a tenant makes a request for a separate supply. However, a prudent landlord will know the capacity of its building and its electrical infrastructure. Once a tenant makes a request, the landlord only has ten working days in which to respond, saying whether or not it is feasible to introduce a separate supply. It would therefore be sensible to have this information readily to hand.

Landlords should also look at their own current electricity arrangements. Sometimes these will be fixed-term contracts at a fixed price, based on assumed levels of consumption. In the worst case scenario, if all the tenants in a multi-let building choose to have separate supplies, the landlord may only be buying electricity for the common parts at a disproportionately high rate until it is free to renegotiate another supply.

However, it is not all bad news for landlords. If a tenant takes its own direct electricity supply, that tenant’s electricity consumption will not count for the landlord’s Carbon Reduction Commitment Energy Efficiency Scheme requirements.

Further information can be found at www.legislation.gov.uk/ukdsi/2011/9780111513965/contents.