What are flexible gas contracts?
The majority of business gas contracts are known as ‘fixed’ contracts. This means that the price of gas is fixed, and all other charges are outlined and remain consistent throughout the duration of the contract. This is great for those customers who want the simplest, most straightforward gas contract available to them. Most of us will be at least familiar with this contract type.
But what about those other customers, who are willing to spend a little bit more time on everything related to their gas supply? Are there any opportunities out there to take advantage of?
Up until recently, the answer would be no. Now – there is.
Flexible gas contracts are a little bit more complicated but can offer some quite impressive results. The price for gas is tied closely to the wholesale gas market, so if the market price begins to drop – guess who now has cheaper energy? You!
Previously, it would only be energy suppliers that really benefitted from price volatility. Now, some of the benefits are passed on to the customer…
… as-well as some of the risk.
How do flexible gas contracts work?
The profile shape of the customer’s demand (consumption) trend is split into two separate categories. These are the baseload, and peak.
The baseload can be thought of as the bulk of demand and is very predictable. Most businesses will be able to provide pretty accurate estimations as they have access to much more detailed levels of data.
The peak is essentially the spike in demand outside of predictable baseload. This peak demand makes up the tradeable volume that is able to be traded within flexible contracts.
The wholesale gas market trades this volume in set blocks, although the matchup between the block and customer profile may not entirely match. As a result of this – customers are able to buy a block of energy that may or may not exceed their total usage.
Where the purchased baseload and peak volumes exceed the customers profile the gas can be sold back to the supplier. In addition to this, when purchased baseload and peak volumes fall under actual customer consumption needs, customers are able to ‘top-up’ and purchase extra volume in smaller blocks.
This is the vector by which the risk and reward of the wholesale gas market is passed onto customers.
The differences between flexible and fixed
Fixed gas contracts have been the norm for ages now, it is about time that another option has been added to the mix. Product variety is never a bad thing.
There are some notable differences between these two contract types which we should all be aware of. We have outlined some of them below.
Fixed Gas Contracts:
- A set price for gas
- Quoted price remains fixed for the duration of your contract
Flexible Gas Contracts:
- Wholesale gas is purchased in smaller quantities throughout the entire duration of your contract
- Freedom of choice for when to buy your energy, and the quantity
- Energy price is tied to the wholesale energy market – which exhibits incredible price volatility
What factors influence the wholesale energy market prices?
We will look at this section for the wholesale energy market as a whole as the factors remain true even when looking at gas as a whole.
- Supply and Demand changes
- Storage (Difference between supply and demand)
- Generation changes
- Import and Export changes (legislation)
- Changing global markets
- Government regulations and policy.
The pros and cons of flexible and fixed contracts
As with almost every other choice worth making, there are associated pros and cons for each option. If your way of thinking is ‘what is the best contract type’ then it is unlikely that you will ever find that great gas contract.
If you subtly change that line to ‘what is the best contract type for me’ then you will place yourself in a much better position to choose the appropriate contract.
We have compiled two tables below of the most commonly encountered pros and cons of each gas contract type. Although it may seem like the balance of pros v cons is heavily skewed, each will hold different value to different individuals.
|Budget certainty through securing a fixed price for gas||If you accept a fixed price during high wholesale energy prices you will be left overpaying and unable to take advantage of lower prices for the duration of your contract|
|Enables accurate forecasting and effective cost management||Competitors may have agreed to fix their prices at a better time, giving them the competitive edge|
|–||To mitigate against the risk of losses, a premium is usually placed on your contract. If you have a longer contract then it is likely you will face higher premiums|
|–||The only scenario that this strategy works is a situation in which the market price of gas is steadily increasing|
|Regardless of market movement, if you have a solid strategy then you can take advantage of the wholesale market||Comparatively risker contract option due to the nature of the wholesale energy market (price volatility)|
|Able to spread out the risk of purchasing energy through multiple purchasing points. Avoids ‘all or nothing’ approach||–|
|Flexibility to align your energy procurement strategy with the wholesale market, instead of fighting against it.||–|
|Reduction in risk premium payments to the supplier as you will be purchasing energy much closer to the date of use||–|
|Reduction in the price you pay with a flexible product that can ‘pass through’ non-energy charges||–|
|Easier comparison of non-energy costs for contract negotiation||–|
|More functionality than fixed contracts||–|
Who (traditionally) benefits from flexible contracts?
Any business that uses over 7 million kWh of energy qualify for the most flexible energy contract offerings. It is worth mentioning that this threshold value has been dropping significantly over the last few years, and this trend may well continue.
For businesses under the threshold value can still benefit from flexible contracts, but may be better off looking for flexible collective products.
Niccolo Gas’ growing product offerings
At Niccolo Gas, we believe in putting the customer first.
This is why we have decided to pass on the benefits of the wholesale energy market on to our customers by now offering flexible gas contracts in our product line-up.
We recognise that flexible gas contracts aren’t for everyone, so don’t worry! If you want to remain on your standard fixed contract then nothing will change for you.
Flexible contracts are a huge part of a better, brighter, and fairer UK energy industry.
If you are interested in flexible contracts or would like to learn a little more about them, then check out our website at niccolo.co.uk to read through some of our informative guides.
If you would like to receive a quote, or even just speak to a friendly voice to help talk you through the process – then give us a call! Our phonelines are operated through all normal UK office hours. We have included all of the various ways you can get in touch with us below.
Phone Number: 0131 610 8868
We look forward to hearing from you!
What is a flexible gas contract?
Flexible gas contracts offer the opportunity to take advantage of the wholesale market price volatility. By operating with no fixed price, it allows the customer to buy gas in bulk when the price is low.
What is the difference between flexible and fixed gas contracts?
There are several main differences between flexible and fixed gas contracts. Fixed contracts are characterised by a fixed price for the duration of the contract, while flexible contracts have the price of energy influenced by volatility in the wholesale gas market.
Why are flexible gas contracts good?
Flexible gas contracts allow customers the chance to take advantage of price volatility within the wholesale gas market. By being able to purchase gas at any time means customers are able to time bulk purchases with downswings in the wholesale market and have a comparatively (to fixed contracts and to others) better price.
Why are flexible gas contracts bad?
Flexible gas contracts allow customers the chance to take advantage of price volatility within the wholesale gas market. However, it also allows the chance for price volatility to take advantage of customers. Purchasing gas at an inopportune time can result in customers massively overpaying for their gas.
Who are flexible contracts good for?
Flexible contracts are particularly good for businesses of small to large operational scale. Flexible contracts can be a good opportunity to find an edge over competitors. If operational costs take a tumble, it can only be a good thing for your business. Also, the sheer volume of consumption multiplies the potential returns.