Why Your Business Should Choose a Flexible Energy Contract
There is no getting around the rising cost of gas and electricity. Despite the UK’s energy demands decreasing year on year, supply levels are unstable, making the wholesale market price very high and very volatile. The charts below demonstrate how the wholesale cost for gas and electricity have increased during the last 12 months.
ELECTRICITY UK BASELOAD
UK NBP GAS
Looking at the increases in these charts, it’s no surprise that many businesses have held off securing new energy contracts. But for most, it’s about to become unavoidable as contract end dates are fast approaching and deemed rates will be applied from the 1st of October.
Businesses coming out of long term contracts that may have been in fixed contracts for two, three, or even five years, are seeing their total contract increase by 300% and in some cases even more!
So you can see why it makes sense for businesses to review their energy buying strategies to ensure they are managing their energy procurement the best way possible. Fixing at the current market highs, even short term, might not be the best option.
How are flexible energy contracts different to fixed energy contracts?
Energy prices are constantly changing, and the date you renew your contract has a significant impact on the rates you pay – especially in today’s volatile market. The challenge for many businesses is that it can be difficult to know which contract options are best suited for your business.
Fixed contracts have the commodity cost and the third party charges fixed for the duration of the contract and are not subject to change. All agreed-upon unit rates are locked in for the length of the contract, so you know exactly what you’re paying for. The challenge with that strategy today, is that you could risk locking out at the very top of the market, leaving you with unsustainably high energy costs.
A fixed fee also includes a supplier risk premium, which has currently risen from 2-3% to over 10%, above the cost of opting for flex and buying 100% on the wholesale market! And to top this off, suppliers retain the right to pass on new charges or any significant increases in existing charges within a fixed price contract, but there’s no obligation to pass on decreases or the removal of charges – something else to think about when reviewing your fixed contract!
Whereas, flexible purchasing 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. A flex strategy lets you take advantage of lower points in the market, with the goal being to deliver a better average contract rate compared to the fixed option. There’s also no risk premium added to your contract (like fixed) as you would be purchasing at wholesale rates.
If your business consumes between 1GWh to 10GWh but you still want to take advantage of a flexible purchasing strategy, then a flexible energy basket is a better option. This is where multiple businesses pool their consumption, allowing traders to purchase smaller volumes for each business by spreading wholesale purchases across multiple customers, and in doing so reducing the risk.
We explain the different contract types in more detail in our Energy Contracts Explained infographics.
Why would a business choose to continue buying energy using a fixed strategy?
We’ve Always Chosen Fixed Contracts
A common reason for not selecting a flexible energy contract is because a business has always been on a fixed contract. It’s what they know and understand. But right now, fixing at the current rates is unsustainable, regardless of how familiar the strategy is.
We Need Budget Certainty
Fixed contracts have traditionally been seen as risk averse, as businesses know exactly what they’re paying for and can allocate budget for the entire contract period. But locking in your contract at 100% now has more risks associated with it.
Right now, energy costs are at all time highs, as everyone knows. But locking out now means you’ll be stuck paying the high costs until the end of your contract. If wholesale prices start to ease off, it stops becoming headline news, and your customers expect your prices to come down in line with falling energy prices, what could that mean for your business?
A flexible approach can help mitigate risks by offering a balanced way to manage current energy exposure. It gives you the ability to buy periods in smaller pieces and to lock in 100% of wholesale costs for shorter periods of time when needed. This spreads the cost (and risk) and allows you to take advantage of any dips in the market.
Why choose a flexible energy contract now?
As mentioned above, a flexible buying strategy allows you to spread the risk. Allowing you to trade for longer periods of time, giving you a better chance of locking in an optimal price.
Tips for Choosing a Flexible Energy Contract
Knowing your energy consumption is a good place to start, it will help to determine if a standalone flex contract or flex basket contract is the best option for your business.
Make sure you select the right partner to manage your flexible energy contract on your behalf. Having a knowledgeable partner is vital for optimal performance.
Understand how your contract is being managed and how your partner is reducing business risks.
Keep track of your hedged volume and always know what is open to market rates and what has been locked in. A good partner will provide regular reports and an even better partner will have a platform that gives you complete visibility.
There you have it, a crash course on why businesses should choose a flexible energy contract. If you’d like to discuss your energy contract options with one of our experts drop us a message at [email protected] and we’ll be in touch.
Author: Colin Gordon, Head of Trading & Risk Management
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