What Are Blend and Extend Contracts? Could Your Business Save Money by Switching?

Increases in energy prices over the last few years have left many businesses looking nervously over their shoulders. Without the protection of energy price caps that apply to domestic consumers, businesses have found these cost rises particularly difficult to deal with. 

But the energy market itself has responded to these concerns, and one new type of contract has emerged that could benefit businesses which is informally known as a ‘blend and extend’ contract, which may help customers on fixed price contracts who may be paying higher rates to take advantage of drops in market prices.

What is a Blend and Extend Contract?

Blend and extend contracts are available across many different types of financing, but it’s in the energy sector where they’ve had the most influence. Within the energy sector, this type of contract is designed to help customers benefit from a drop in market prices despite having previously been signed up to a fixed-term contract at higher rates. These new rates kick in immediately when the revised contract is finalised, meaning that they apply immediately and should last for a longer amount of time than your current tariff. 

How Can Blend and Extend Contracts Save Your Business Money?

Blend and extend contracts offer businesses a strategic way to reduce energy costs while maintaining price stability. These contracts allow businesses to renegotiate their existing fixed-rate energy agreements by blending current market rates with their existing rates, resulting in a lower unit price. In exchange the contract duration is extended, typically by 12 to 24 months.

But what might this look like in practice? Let’s assume a business was locked into a fixed-rate contract at 30p per kWh during the energy crisis. By blending with lower current market rates at, say, 20p per kWh, the new blended rate becomes 25p per kWh. This results in a 16.7% reduction in energy costs over time while tying the business to that lower rate for a more extended period. 

Pros and Cons of Blend and Extend Contracts

Sounds too good to be true? Well, not quite, but as with any financial commitment, there are both pros and cons to blend and extend contracts. Businesses benefit from lower energy rates immediately, easing financial pressure, while fixed blended rates offer protection against future market volatility, offering the sort of predictability and stability that has been all too missing from the energy market over the last few years. Such contracts are ideal for businesses satisfied with their current supplier. It might even be that you’re on deemed rates, which could make such a contract change necessary.

However, there are other considerations that you should consider, and blend and extend contracts are not for everyone. The blended rate is often higher than the lowest market rate, which could lead to higher costs over time. Such agreements lock businesses into longer-term periods, which will limit your flexibility should you wish to switch suppliers further down the line. It’s also worth remembering that not all suppliers offer these contracts and that they may not be ideal for businesses expecting further drops in market rates.

Steps to Negotiating a Blend and Extend Contract

How do you take advantage of a blend and extend contract if you believe one suits your business? Here’s a step-by-step guide on how to go about it: 

1. Review your current contract: Understand your existing rates (and don’t forget any standing charges), contract duration, and terms. Critically, you’ll need to identify how much time remains on your current agreement.

2. Analyse the market: Research current energy market prices to determine potential savings. You can use this data to confirm how feasible switching contracts would be for your business before even contacting your supplier.

3. Contact your supplier: Contact your energy supplier’s account manager or customer service team and express your interest in renegotiating under a blend-and-extend arrangement.

4. Negotiate: It’s… negotiation time! So remember to discuss the duration of the extended contract—this will typically be 12–24 months—and try to include other clauses for flexibility, such as price reviews or early termination options.

5. Get it in writing: Once you’ve reached an agreement with your supplier, obtain a detailed agreement outlining the new blended rate, contract duration, and terms.

There are things that you can do to maximise the benefits that your business can take from negotiating a blend and extend contract. Negotiate when market rates are low. This will help you to secure better terms. You can make this easier by keeping an eye on those market rates. Including provisions for adjusting rates if market conditions change will give you greater flexibility in the future, while employing energy brokers or advisors to negotiate on your behalf may strengthen your position.

Blend and extend contracts aren’t for everybody. If you’re already on a variable rate or happy with your current energy contract terms, you may not need to do anything at all. But for those who are struggling with increasing fixed-term rates, they could be a life-saver for your business. All businesses should regularly evaluate all their contracts. Energy prices are likely to increase again within the next twelve months, and by doing so now, you can reduce your outgoings and possibly even lock in favourable rates for a reasonable amount of time. Contact an energy consultant or your energy provider today, and you might find that it starts sooner than expected.