Fixed vs. flexible energy contracts

Is your current pricing plan best for your needs?

During the uncertainty of the last few years, volatility in wholesale energy markets has become the new norm. In a previous post, we discussed whether a fixed or flexible energy contract is best when prices are volatile, but it’s important to review the situation regularly.

Choosing the right contract type can help you cut costs, manage your budget requirements and balance risk in relation to exposure to market volatility.

As your partner in planet-first energy, you can expect us to report the pros and cons of various contracting options, and explore which ones are the best match for different attitudes to risk management.

What’s the difference between fixed and flexed contracts?

With a fixed contract, the price for each unit of energy is fixed on one day for a set amount of time—typically 12–24 months.

Flexible contracts allow businesses to purchase their energy in smaller chunks during the contract period, rather than all in one go.

We’ve listed the pros and cons of each here.

When’s it best to choose fixed pricing?

If budget certainty is a prime concern for your business, then a fixed-price contract can be a good choice. In this situation, stabilising your budget is key, as cost increases can’t be passed on and could eat into your budgets or profits. In marketplaces like these, limiting exposure to fluctuating wholesale energy prices is crucial.

Fixing a price will ensure you know where you stand month on month, so it’s easy to budget for your energy spend.

Hospitals, schools, and other public sector organisations with fixed budgets can benefit from fixed pricing. You can read more about public sector procurement here.

Even much larger energy users may be better off with a fixed contract in some cases. For example, for manufacturers operating in price-stable marketplaces, or where energy isn’t a large proportion of the total spend. In these circumstances, the benefit of stable energy costs outweighs that of possible cheaper prices in the future.

How busy is your business? That could be another determining factor. Fixed price contracts tend not to require as much attention as flexible ones, so may be a more realistic option if your business doesn’t have the resource capacity to oversee a flexible arrangement. For this reason, many smaller businesses opt for fixed.

When might flexible pricing be better?

Flexible energy contracts offer advantages for a variety of businesses and organisations, as long as the right risk-management strategy is applied.

If you’re aiming to secure close to or below the market average, a flexible contract could be your best option. Achieving market average or better is essential here, in order for you to remain competitive in your marketplace. For example, a food manufacturer could pass on price decreases to gain market share.

The key is to adopt a progressive risk management strategy, in other words buying little and often to achieve this average or better position. Depending on your appetite for risk, this position could then be improved by using strategic sellbacks or day-ahead markets when favourable.

Flexible contracts also come with other price benefits such as reduced supplier risk premiums.

Even budget-focused clients can benefit from flexible contracts, providing the risk of market exposure is addressed with a comprehensive risk management strategy. For example, strict stop losses can be employed to manage budget breaches. Trading timetables or volumetric corridors can also be used to ensure risk is managed 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 specified budget level requirement.

Flexible contracts can also be highly advantageous to customers whose consumption patterns vary—for example, businesses whose energy consumption fluctuates with orders or bookings. These contracts allow you to re-forecast your consumption during the contract period, and most suppliers don’t limit how often this can be done. 

To get the most out of a flexible contract, you’ll need a suitable risk strategy, a solid understanding of the wholesale energy markets, and the time and resources to monitor these markets continuously. For this reason, customers choosing flexible contracts tend to work with an energy consultancy to ensure the correct risk management strategy is designed and followed. That’s where we can help as your expert partner in energy procurement.

It’s important to consider that many suppliers have increased volume thresholds for bespoke, or stand-alone, flexible contracts—in some cases by as much as 20GWh. If your organisation can’t access stand-alone flexible contracts, our framework offers an option to purchase energy flexibly, regardless of volume levels. We also offer a variety of strategy options to match your priorities, whether you’re working with a strict budget or more savings-focused.

Things to think about

While prices have calmed from the highs of 2022, they’re still very sensitive and likely to stay volatile for some time. This means it’s still vital to evaluate your energy pricing strategy. Tendering your requirement to the full suite of suppliers, whether fixed or flexible, is key and will ensure you get the best possible deal for your organisation.

Because of this ongoing volatility, being prepared is the key to securing contracts quickly if we see known, or unknown, risk factors emerging. We recommend you issue your tenders to the marketplace well in advance of renewal, to streamline the process of accessing prices in future.

It’s also important to consider how you contract non-commodity elements when evaluating your energy procurement. If you’re budget-focused, you may want to fix these elements to avoid any surprise price increases during the contract term, but remember this will come at a premium.

If you’re savings focused, you might want to pass through these elements to reduce risk premiums in your rates. It’s possible to combine fixed and pass-through commodity and non-commodity options on all contracts. For example, you could opt to buy the commodity flexibly and still fix non-commodity costs. This can provide an extra layer of certainty which is appealing to budget-conscious customers who still require a flexible commodity approach.

Last but by no means least, have you considered investing in and implementing energy efficiency measures? From lighting upgrades to introducing staff awareness programmes, there are so many ways to help reduce your business energy consumption—and the knock-on effect of doing that is cost savings through lower energy bills.

Better placed to benefit

Hopefully, by considering the points above, you’ve gained a deeper understanding of whether a fixed or flexible pricing model would be best for your organisation, whether you’re restricted by a fixed budget or you have an opportunity to take on some risk.

Suitability is highly dependent on your organisation type and sector, so being able to make an informed assessment of your specific needs is essential in choosing the best option.

Whatever contract type you opt for, monitoring your energy bills closely is something you should do regularly. This will help identify any unusual spikes in either usage or costs, so you can address any issues before they escalate. It’s also well worth dedicating some time to conduct a review of your energy usage, which could result in valuable savings if you spot potential opportunities to reduce your consumption.

With decades of experience in helping customers reduce their energy costs, optimize their procurement strategies and switch to more sustainable sources, our expert team will be happy to guide you in choosing the right contract for your circumstances. Just get in touch.