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Fixed vs Flex: Which is right for your business?

27 October 2023

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Is your current pricing option the correct one?

Following an unsettled few years, volatility on wholesale energy markets is becoming the new norm. We've previously covered whether a fixed or flex energy contract is best when prices are volatile but now, as we head towards the end of 2023. There is a great opportunity to assess which option could suit your business into 2024 and beyond.  

Selecting the right contracting option can help target  cost savings, manage budget requirements and manage your business specific risk with regards to exposure to wholesale market volatility. Throughout this article, we’ll weigh up the pros and cons of various contracting options and examine which customers may benefit from using the various approaches to manage risk. 

What’s the difference between a fixed and flexed energy contract?

Fixed pricing is a type of energy contract where the price for each unit of energy is fixed on one day for a set period (typically 12-24 months). Flexible contracts are essentially a framework which allows the end user to purchase energy in smaller chunks during the contract period, rather than all at once.

Check out the pros and cons

When to choose fixed pricing?

A fixed pricing model can be a good option for customers where strict budget certainty is the primary concern. Stabilising budgets is the key priority for these types of customers as cost increases cannot be passed on and will eat into budgets or profits. Limiting exposure to fluctuating wholesale energy prices is essential in these types of marketplaces.

Fixing a price will ensure your energy spend is effectively budgeted for, due to knowing your spend month on month. Schools, Hospitals and other public sector organisations with fixed budgets can benefit from fixed pricing (read more about public sector procurement).

In some cases, even much larger energy users may benefit from a fixed contract. Examples could be manufacturers operating in price stable marketplaces, or where energy spend is not a large proportion of the total spend. For these customers, the advantage of stable energy costs outweighs benefits brought by the possibility of cheaper prices in the future.

Typically, fixed priced contracts require a less hands-on approach when compared with flexible contracting options. This means a fixed approach is a more realistic option for businesses which may not have the resource capacity to oversee a flexible arrangement. Smaller businesses tend to adopt a fixed price approach for this reason.

When to choose flexible pricing?

A flexible pricing model can be suitable for a variety of customer types, providing the correct risk management strategy is applied.

For customers aiming to secure close to, or below, the market average, a flexible contract can increase the likelihood of achieving this goal. Achieving market average, or better, is key for this customer type as they need to remain competitive in their marketplace. An example could be food manufacturing where price decreases will be passed on to gain market share.

The key would be a progressive risk management strategy i.e., purchasing little and often to achieve this average, or better, position. Depending on risk appetite, the position could then be improved upon by utilising strategic sellbacks or utilising day-ahead markets, when favourable. Flexible contracts also come with other price benefits such as reduce supplier risk premiums.

Even budget focussed clients can benefit from flexible contracts, providing the risk of market exposure is managed through a comprehensive risk management strategy. As an example, strict stop losses would be employed to manage budget breaches. Trading timetables or volumetric corridors can also be employed to ensure risk is covered off well into the future. Target lock in levels can also be set for various periods, so positions are fully locked when prices reach levels that meet the customers budget level requirement.

Flexible contracts can be extremely beneficial to customers with varying consumption patterns. These contract types allow customers to reforecast their consumption during the contract period and most suppliers do not limit how often this can be done. Examples may be businesses where energy consumption varies with orders or bookings.

Getting the most out of a flexible contract requires a suitable risk strategy, a solid understanding of the wholesale energy markets and the time, and resources, to constantly monitor these markets. This can prove difficult for many organisations as they have many other priorities to contend with. For this reason, customers opting for flexible contracts tend to engage with an energy consultancy to ensure the correct risk management strategy is designed and executed.

It’s important to consider that many suppliers have increased volume thresholds for bespoke, or stand alone, flexible contracts; in some cases, as much as 20GWh. For customers that cannot access stand-alone flexible contracts, Our framework offers a facility to purchase energy flexibly, regardless of volume levels. Furthermore, there are a variety of strategy options to cater for the full spectrum of profiles from strict budget to savings focussed customers.

Things to consider

Whilst prices have calmed from the highs of 2022, they remain extremely sensitive and volatility is likely to remain a theme into 2024 and beyond. This means it’s still crucial to evaluate your energy pricing strategy. Tendering your requirement to the full suite of suppliers, whether fixed or flex, is key and will ensure that you are getting the best deal possible for your organisation.

Due to remaining volatility, preparedness will be key to secure contracts quickly if we see known, or unknown, risk factors materialising. Therefore, we would encourage organisations to issue their tenders to marketplace well in advance of renewal to streamline the process of accessing prices in future.

How you contract non-commodity elements is also important to consider when evaluating your energy procurement approach. Budget focused businesses may wish to fix these elements to avoid any surprise price increases during the contract but, this will come at a premium.

If you are savings focussed, you may wish to pass through these elements to reduce risk premia in their rates. It is possible to combine fixed and pass-through commodity and non-commodity options on all contracts. As an example, a customer opting to buy the commodity flexibly can still fix non-commodity costs. This can provide an added layer of certainty which can appeal to budget conscious customers still requiring a flexible commodity approach.

One final option to look at is investing and implementing energy efficiency measures. From lighting upgrades to introducing staff awareness programmes, exploring the wide array of measures out there, you can contribute to reducing energy consumption. The knock-on effect of doing so is cost savings through a lower energy spend.

Moving forward

In summary, whether you’re restricted by a fixed budget, or you have an opportunity to take on some risk. Hopefully, the points outlined above have given you enough to understand whether a fixed or flexible pricing model suits your organisation.

Choosing a fixed or flexible strategy is highly dependent on your organisation type and the sector you operate in. So truly understanding your organisation’s needs will play a crucial role to ensure you secure the best price.

Monitoring energy bills closely is something you should do regularly; this will help identify any unusual spikes in either your usage or costs. Closely linked is dedicating some time to perform a review of your energy usage, a valuable exercise if you uncover potential areas to reduce your consumption.

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Please call our team on 0345 634 9500 or email us at info@tridentutilities.co.uk.