Energy Contracts Explained

There are many different ways organisations can buy the energy needed to power their business – understanding what options are available is critical to creating and delivering a successful energy procurement strategy. 

Energy Contracts Explained

The first thing to understand is that there are three main types of energy contracts that businesses can choose from: Fully Fixed, Pass-Through, and Flexible contracts. Understanding these options and their benefits will empower your business to make the best choice for its unique needs.

Fully Fixed Contracts 

A fully fixed contract locks in both the commodity and Third Party Charges (non-commodity costs) at a single, unchanging rate for the contract duration. This is ideal for businesses wanting simplicity, as it provides stability and peace of mind against market volatility.

However, the added stability comes at a cost. Suppliers can include a risk premium in the rate to cover any potential increases in Third Party Charges. While this means a higher price, it eliminates surprises, making it a strong choice for businesses prioritising predictability over potential savings.

Pass-through Contracts

A pass-through contract divides your energy costs into two components: fixed commodity costs (the actual energy you consume) and variable non-commodity costs. While your commodity costs remain fixed, the non-commodity costs are open to any changes in these rates, set by Government, National Grid or District Network Operators (DNOs). In a pass-through contract, your supplier passes these costs directly onto you at the prevailing rate at the time.

This type of contract provides greater flexibility and transparency than fixed contracts. For instance, businesses can benefit if any Third Party Charges reduce, and if the business becomes eligible for access to government or network support schemes which reduce or eliminate certain costs, the savings can be passed directly to you, whereas in a fixed contract, these costs are wrapped up into a single unit rate that cannot be decoupled, therefore the saving is not passed on. 

However, there are trade-offs. Budget certainty is reduced compared to fixed contracts, and the billing process can be complex. Suppliers often estimate Third Party Charges upfront and reconcile them later, which may result in unanticipated costs.

Flexible Contracts 

A flexible (or “flex”) contract allows businesses to buy energy in smaller chunks, taking advantage of market fluctuations. Commodity costs are determined based on how and when your energy volume is traded, while Third Party Charges are charged at the prevailing rate and reconciled similarly to pass-through contracts.

This approach provides maximum control and the potential for significant cost savings. Businesses can set price caps for better risk management and enjoy increased visibility of future budgets based on current market trends.

Flexible Energy Baskets

For businesses with lower energy consumption, a flexible energy basket can be a viable option. By aggregating tradeable volume with other companies with a similar risk appetite, smaller businesses can access favourable flex rates typically achieved by larger consumers.

Expert traders manage these baskets, actively negotiating and trading on behalf of participants to maximise savings. This ensures that even low-energy businesses can benefit from competitive pricing and expert procurement strategies.

Why should you look at an effective procurement strategy? 

With energy costs back on the rise, an effective procurement strategy that looks ahead can make all the difference. By partnering with energy experts, your business gains access to a broader range of suppliers, tailored contract options, and precise forecasting tools.

Our expert traders, account managers, and bureau analysts are on hand to ensure your business secures the best energy contract for its needs. Whether you’re seeking stability, flexibility, or cost savings, we’ll help you craft a procurement strategy that supports your financial goals. 

Learn more about our energy procurement services and take the first step toward smarter energy management.

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