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Energy Contracts Explained

Energy explained - Infographic Explaining Energy Contracts

Fully fixed contracts have the commodity cost and the Third Party Charges fixed for the duration of the contract and are usually not subject to change. If your business wants budget certainty then a fixed contract is the ideal choice. All agreed unit rates are secured for the length of the contract – meaning you know in advance what you’re paying.

You often pay a higher price for the security as the supplier takes the risk – suppliers can include a risk premium in the unit rates to cover any legislation change that would result in Third Party Charges increasing. You are also bound by the volumes set at the time of purchase, unless you have agreed a volume tolerance free contract – this is something which has been problematic for many businesses during COVID-19.

Pass Through contracts split your energy bill between the fixed commodity costs (the cost of your energy) and non-commodity costs (third party charges) which can vary over time. This means any non-commodity charges the supplier incurs will be passed to you, and you take the risk of these costs increasing.

Pass Through gives you the ability to benefit if the non-commodity costs fall in the future. These contracts also give you the opportunity to manage your usage patterns to avoid time of use periods, which can be beneficial and potentially lower your energy bill.

You don’t get the budget certainty of fully fixed and these contracts are much more complicated. With many of the third party charges being passed through, suppliers often bill on assumptions of what those charges could be and then reconcile. This means you may see additional charges not originally budgeted for on your bill.

Flexible contracts is a buying strategy where the commodity costs are determined by how your volume is traded throughout your contract and the third party charges are passed through.

You can buy in smaller chunks, taking advantage of fluctuations in the market and locking in prices at optimum time. By taking full buying control, there is potential for good savings opportunities; if you know what you’re doing.

There is no budget certainty on a flex contract. The commodity cost is determined by how it has been traded and the third party charges are subject to reconciliations in the same way pass through contracts are.

What ever your appetite for risk, make sure you work with an energy partner who understands the markets and your business requirements. Whether it’s a budget certain fixed energy contract, a variable passthrough contract or a risk managed flexible energy contract our Energy Traders work with hundreds of clients to choose the best contract for their business.

  • Author: Chris Bennett, Pricing Analyst

  • Creative: Gabriel Ashworth, Marketing Assistant

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