Summary and implications  

From 3 March 2011, owners of multi-let buildings who bulk-buy electricity supplies and then on-charge to their tenants could be in for a shock. New legislation will provide powers for tenants to get better electricity deals from alternative electricity suppliers and the new rules may also mean that landlords could be committing criminal offences.

Background

Under current arrangements, it is typically the case that landlords of multi-tenanted commercial premises will choose both the supplier of electricity and the terms of supply. The landlord will then pass on to the tenant a fair proportion of the costs based on a calculation of sub-metering, square meters or an (appropriate) alternative method.  

Under this typical arrangement, the law states that:  

  • The landlord is a “supplier” of electricity and the tenant is his electricity “customer”; and  
  • The landlord is operating a “distribution system”.  

Fortunately, under current UK law, many landlords benefit from an exemption (even if they do not realise it) which means that they are not obliged to hold the very expensive electricity supply and distribution licences granted by Ofgem.

However, things are about to change for exempt landlords.

New legislation

The current UK regulation does not comply with EU law and is set to be amended on 3 March 2011. This is a result of the Citiworks case (ECJ C-439/06) which confirmed that national laws must enable customers (tenants) to freely choose their electricity suppliers and ensure that electricity distribution systems are open for use by anyone. More particularly, the case confirmed that there is no “de minimis” threshold below which the rules do not apply.

This means that the new rules will apply to all situations where landlords own multi-let buildings or divided estates and they pass on the cost of electricity (no matter the size of such distribution system) to their tenants.

Luckily for those affected, the Government is being reasonably pragmatic. The new rules will not require suppliers (landlords) to do anything unless, or until, they receive a request from one of their customers (tenants). Unfortunately, once a tenant states that they would like to receive electricity from another supplier, the landlord must respond within 21 days or risk committing a criminal offence.

Potential solutions

The regulator, Ofgem, will shortly be providing new guidance on enforcement to reflect the Government changes but until then it seems landlords have three main options for providing third party access:  

  1. The neatest (and most legally simple) solution is to provide a separate supply of electricity on a separate settlement meter (like the ones the utilities companies bill against). However, this will certainly be expensive and practically very difficult to implement.  
  2. Landlords could put in place a complex series of agreements to enable a “virtual settlement” process to take place – the arrangements would mirror (at a micro-level) the arrangements that exist in the world of licensed electricity suppliers and licensed electricity distribution network operators. The Department of Energy and Climate Change is currently working on possible implementation models. However, these need to be evolved beyond simply identifying the issues so that they can be turned into fully functioning “plug n' play” solutions so that a landlord who receives a request can respond in time and avoid criminal charges.  
  3. Alternatively, some large landlords (with more sophisticated energy buying procedures) may simply be able to challenge the tenant's business decision; it is unlikely that many tenants, except for perhaps the largest few, can actually get a better deal from another electricity supplier.  

Looking forward  

The proposed legislation operates with the protection of the consumer in mind and will seek to ensure competition in the energy supply market with the end goal of driving down prices. Fortunately for landlords, they will only be affected where a tenant successfully requests to receive energy from an alternative supplier. Unfortunately, it is not clear to what extent tenants will use their new found powers. However, if ever there was ever a time for landlords to think about their metering and energy supply services, this is it.