Energy procurement: fixed and flexible approaches

This article explains those differences between fixed and flexible in relation to differing organisations alongside a third alternative, our Flexible Energy Procurement Framework. 

What is a fixed energy contract? 

A fixed energy contract is a form of business procurement where your energy rates are agreed at the time of the contract. This will be a fixed rate for a fixed period, usually between one and two years. 

These are the standard and most commonly available contracts and will be open to businesses of every size and usage. The rates offered will be impacted by your projected consumption, but this will only happen before the contract has been agreed. 

Fixed contracts are good for organisations that require budget certainty, as you can ensure your spending will be at a set rate. They can also be helpful to protect against price volatility, which usually makes them a safer option for businesses. You do pass off the opportunities that come from riding the market changes, which means you could pay more than the prices achieved on a flexible contract (but also, of course, pay less). 

What is a flexible energy contract? 

Flexible energy supply contracts are when an organisation buys their energy at differing points rather than at a singular fixed rate. This offers the opportunity to spread the energy procurement risk across a much bigger buying window, allowing you to potentially benefit (and suffer) from the fluctuating prices of market conditions.   

Because of this flexible approach, you have more opportunities to beat the market prices. If you are a business where energy costs represent a substantial proportion of your total costs, such as a metals manufacturer, making a big saving through this can help you gain a competitive advantage, something our client Signature Flatbreads enjoyed).   

If your business is better prepared to handle risk and less reliant on budget certainty, flexible energy contracts can deliver hefty savings. They are also usually only available to certain organisations, as many energy providers only offer flexible contracts to those that use energy above a specific threshold.

Is there an alternative?

A “partial flex” or “pass-through” procurement strategy predominantly refers to a pricing arrangement whereby a portion of the energy costs incurred are adjustable based on market conditions. Then the remaining costs are to be passed onto the consumer with no alterations. 

The term partial flex is where only a portion of the energy costs are subject to flexibility. For example, a contract could detail that a percentage of the costs can vary due to market fluctuations, with the rest remaining fixed or that use a different pricing mechanism. 

Whereas the term pass-through is essentially a practice that results in certain costs being passed directly to the consumer, with no markup by a supplier. Transmission charges, taxes, or other non-negotiable fees are examples of the costs being passed on directly. 

With the two combined, this type of agreement allows for a degree of price stability, with the chance for cost optimisation dependant on market conditions. 

There is an additional option which offers a form of flexible contract. While most traditional flexible contracts are restricted to significant users, we differ from other energy procurement companies by offering a solution which smaller energy users can capitalise on.  

Our Flexible Energy Procurement Framework bunches you together with similar energy users, increasing your buying power and allowing you take advantage of wholesale prices. It’s also consistently delivered strong results, helping our customers to make savings up to 34% on the market averages.  

The benefits extend beyond saving money, a fully managed framework frees up time and resources. This down to the procurement processes being more streamlined and seamless, relieving resource allows for a concrete focus on core business activities.

Within a flexible framework procurement strategy, tolerance management emerges as a crucial advantage. By adeptly managing tolerance levels, this approach ensures that procurement strategies consistently operate within predefined parameters. This proactive measure significantly mitigates the risk of unforeseen costs or disruptions, providing stability and predictability to the procurement process.

Which is best for my business? 

Deciding whether to explore a fixed or flexible contract - or a framework - depends very much on your businesses unique circumstances, particularly your appetite for risk. We’ve gone into further detail on which to opt for in this article: Fixed vs Flex: Which is right for your business? 

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