Energy costs

Revealed: Schools’ moral dilemma over Russian energy contracts

Trusts explore cutting ties with Gazprom, but face exit fees and ten-times more expensive new contracts

Trusts explore cutting ties with Gazprom, but face exit fees and ten-times more expensive new contracts

Investigation


Academy trusts face “severe financial penalties” if they exit gas contracts with Russian-firm Gazprom, with warnings they face “jumping out of the frying pan into the fire” as energy prices soar. 

School leaders were seeking urgent legal advice this week on whether they can cut ties with the energy firm following the Russian invasion of Ukraine.

One council leader said it was “immoral” for public bodies to financially support the Russian “war machine”.

But sector experts warn backing out of contracts is “difficult”. Even if they do, trusts face potentially taking millions of pounds away from children’s education to pay for new deals at much higher prices.

United Learning, the country’s largest trust, said it would face ten-times higher costs if it cancelled its Gazprom contract and bought from the now hugely-inflated gas market.

It is very hard to see how schools and colleges can address this problematic situation on their own

Unions are urging the Department for Education to make “emergency funding” available to cover cancelled contract costs. 

Gary Smith, GMB general secretary, said: “Gazprom contracts are morally indefensible. Every pound spent on heating classrooms could end up fuelling Putin’s war machine.”

Trusts face Russian gas moral dilemma

Trusts are attempting to navigate legal quagmires over cutting ties with Gazprom.

The CORE Education Trust said it would face “severe financial penalties” by withdrawing early from its £1 million contract with Gazprom and EDF. But a spokesperson added “we are looking at all options and will be discussing our next steps with our board.”

“As a trust with two refugee status schools, we have a strong track record of supporting communities in crisis and, like everyone, are incredibly concerned about the situation in Ukraine,” the spokesperson added.

United Learning said working with Gazprom is “obviously now uncomfortable”, but they “do not believe that we currently have a lawful way of breaking our contract with them”. 

Graham Burns, education partner at law firm Stone King, said the “current situation in Ukraine would not be a lawful reason to terminate contracts”.

gazprom

Trusts would have to “consider carefully the terms of their contract and any breakage costs which would apply”.

Tim Golding, head of strategic partnerships at Zenergi, which supports 3,000 schools to find energy deals, said there are particular problems for those on fixed-term contracts.

“In most cases, it is not possible to come out of given the contractual obligations that were agreed at the point the contract was secured.”

Termination charges would run into the thousands, he added. Schools on flexible contracts have a “higher chance” of being able to cut ties without huge fees.

But trusts are considering stumping up termination costs.

Meanwhile, Aspirations Academies Trust is looking to “cut ties” with the Russian firm and “taking legal advice about how to get out of the contract”. They switched to the firm in November last year when their previous supplier went bust. 

Councils push for law change

As academy trusts receive taxpayer cash, they are required to follow The Public Contracts Regulations 2015.

These laws state authorities “shall treat economic operators equally” and “without discrimination”. Also, procurement should not be “made with the intention of excluding it” or “narrowing competition”. 

In 2016, the BBC reported Leicester City Council boycotted goods from Israeli settlements in the West Bank, saying it “opposed the continuing illegal occupation” of Palestinian territory.

But the Crown Commercial Service (CCS) said boycotts in public procurement were “inappropriate” outside of legal sanctions, embargoes and restrictions being put in place by government. 

Councils – also looking to cut ties – are now pushing for a law change.

The current Local Government Act bans councils from considering things like the location of the bidder or any political affiliations when awarding contracts.

Salford City mayor Paul Dennett has written to Levelling Up secretary Michael Gove saying Gazprom’s involvement in bidding for tenders is “enshrined” in the public sector regulations. He said there may be “no way to limit bids” from the company.

Merton Council has asked for the law to be changed.

Mark Allison, the leader of Merton council who has asked for the law to be changed, said “it is immoral for British public sector bodies, such as councils, schools, hospitals and so on, to provide financial support to that regime”.

Both councils have contracts for its schools with Gazprom.

‘Frying pan into the fire’

But Chris Felgate, director at Ginger Energy, said cancelling gas contracts in the current market “is like jumping from the frying pan into the fire”. 

As well as termination penalties, the price of gas is now “multiple times higher than it was even this time last year” – enough to have a “seriously detrimental financial impacts on any institution”. 

United Learning secured all of its energy for 2021-22 and 50 per cent for 2022-23 and 2023-24 when prices were “vastly lower than they are now”.

The trust said the remainder of this year’s gas contract will likely be £500,000. However, if repurchased at yesterday’s price, it would cost £4.7 million. 

“This money would therefore no longer be spent on educationally valuable activity but would instead go back to the oil and gas industry,” a spokesperson said.

“More money would be returned to the Russian state, since the gas we are securing now at a low price would be sold at a much higher price.”

Gazprom supplies 20.8 per cent of non-domestic gas in Great Britain. Golding said they have historical been “very competitive”.

The firm’s website states it also not depend on Russian gas supplies “any more or any less than other gas suppliers” in the UK. 

‘Give schools emergency funding’

Hayley Dunn, business leadership specialist at school leaders’ union ASCL said, schools may feel they are “stuck between a rock and a hard place”.

“It is very hard to see how schools and colleges can address this problematic situation on their own and the government needs to step in with sanctions and practical guidance or assistance as soon as possible.”

Outwood Grange Academies Trust has a £485,000 fixed term contract with Gazprom, alongside six other suppliers until 2023. They say they are awaiting guidance from government. 

Delta Academies Trust is also seeking Department for Education advice on how they could end their Gazprom contract, which runs until 2023, “at the earliest opportunity”. 

Gazprom has been banned from raising debt in the UK and accessing its capital markets – but the firm said “nothing has changed” for its customers.

United Learning said “if government sanctions legally banned trading with Gazprom Retail, then clearly our contract would be void due to illegality”.

One energy expert said this would be the “worst scenario” though, leaving energy regulator Ofgem having to find replacement customers for all customers with cancelled contracts.

Russian natural gas makes up less than four per cent of the UK’s supply. But business secretary Kwasi Kwarteng said he is “exploring options to end this altogether”.

Ministers are also looking how to “cut ties” with Gazprom from the CCS’ Schools Switch scheme, a website that helps schools secure better energy deals.

But GMB’s Smith said as government “encouraged schools to sign up to Gazprom – it is right that the costs of exiting those contracts should now be covered” by government.

Gazprom said it does not comment on commercial matters or contractual arrangements with individual customers. 



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2 Comments

  1. Gazprom Retail is a UK registered company but its ultimate owner is the Russian Federation, so any profits made in the UK will ultimately be remitted to the Russian Government. But Gazprom is not importing Russian gas, it is buying gas already in the UK from the mix of sources we have in place, just as any other supplier is doing. So the issue is not supply of gas by Gazprom but its remitting of profit to Russia. Therefore the solution would be to prevent that action through sanctions and financial controls, thus allowing Gazprom Retail to continue to supply gas on its existing contracts.

    If we pay a penalty for breaching/terminating a contract, Gazprom will receive the penalty without incurring any costs – so will have a “super profit”. It is not in our interests to terminate contracts – much as it may seem immoral to continue

  2. Agree with Phil here.
    Not only will Gazprom get a windfall from exit fees, they’ll also be able to sell the gas back into the market at a much higher margin than supplying under lower-priced contracts anyway.
    Ironically therefore, the best way to prevent this is to keep the contract in place.