Traditionally – the energy industry in the UK has always been pretty one dimensional. You pay for the energy you use at a fixed price for the duration of your contract. This simple format benefitted a British public who valued simplicity highly.
But now, this is no longer the case. As the industry has grown, so too has it diversified the product offerings available to business and domestic customers alike. Competitive markets are great for driving innovation.
Now, there are opportunities available for customers to exploit the wholesale energy market in the same fashion that suppliers have been doing so for years. This can help to achieve a dramatic reduction in energy costs for the customer.
But, as we will go on to answer, does cheaper always mean better?
What are flexible gas contracts?
First, it may be sensible to explain exactly what this new product offering is. Flexible gas contracts are probably something many of us have heard of, but couldn’t explain how they work.
The profile shape of the customer’s demand (consumption) trend is split into two separate categories. These are the baseload and peak. We will go on to explain this, don’t worry.
The baseload can be thought of as the bulk of demand and is the predictable portion of the customer’s energy. Most businesses will be able to provide pretty accurate estimations as they have access to much more detailed levels of data. This is usually through combinations of smart meters, sub-meters, and even auditing.
The peak is essentially the spike in demand outside of predictable baseload. The stuff that nobody foresaw needing. 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 match-up 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. There are actions to resolve any mismatches of demand and purchased volume.
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 where the term ‘flexible’ energy contract really comes from – it allows a much greater degree of freedom to the customer. This is the vector by which the risk and reward of the wholesale gas market is passed onto customers.
Key Identification Features
There are several key features of each contract type that customers should be aware of. Although this list is by no means exhaustive, it does include the most relevant features to new customers.
|A set price for every gas unit you use.||Wholesale gas is purchased in small chunks throughout the entire duration of your contract.|
|The quoted price remains fixed for the duration of your contract.||Freedom of choice on when to buy your energy, and the quantity.|
|–||The wholesale energy market heavily influences price through its incredible price volatility.|
Pros V Cons
When trying to compare any two things that seem to be held in relative parity, it is sometimes useful to write out all of the pros and cons associated with each option. This helps to put all relevant factors to consider in one place, aiding a better decision.
|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 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 throughout multiple purchasing point. 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 supplier as you will be purchasing energy much closer to the date of use||–|
|Reduction in 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||–|
Why the cheapest may not always be the best
It is usually only businesses over 7 million kWh of energy demand that qualify for the majority of flexible energy contract offerings. Although this threshold value is dropping – this will disqualify many.
Even when calculating what contract may offer the cheapest prices, it is imperative to take into consideration the parameters in which your business functions. How much of your annual costs are taken up by energy? Do you require huge amounts of power to operate? How is the current financial situation of the business – can it withstand an unexpected financial blow?
Although yes, flexible gas contracts can and do absolutely offer access to the cheapest prices for energy, this may not be the best option for all businesses. It may seem counterproductive to not secure the cheapest energy at all times, but there is sound reasoning behind this statement.
Take for example a small single facility business with a tight budget looking to procure a new gas contract for the coming year. When it comes to choosing between a flexible or fixed contract, it is more advisable for this business to go with a fixed rate.
This is because the unique features of this contract type are deemed more important based on the operational needs of the business. The security to forecast with accuracy is probably more worthwhile than any small savings on unit price. It is sensible to not take on any unnecessary risk if the business is not able to withstand it, due to the financial position of the business and the vulnerability to market forces with flexible contracts – they are best to steer clear of this option.
A business with a huge operational scale and strong financial stability may look at a flexible contract more favourably as they have the massive consumption to make the most of any unit price savings and the ability to withstand any upswings in the wholesale market.
If you are curious to find out which may be the best contract type for your business, get in contact with one of our energy experts today at: niccolo.co.uk
Some food for thought
As we have mentioned – there are so many things that should come into consideration when finding the ‘best’ energy contract. We have created a small list of some of the things that should help to guide your decision between energy contracts:
- Business consumption
- Variability in consumption/demand
- Financial stability
- Current wholesale market situation
- Future energy news/policies
- Ability to withstand higher prices
- Planned future company expansion/development
Niccolo Gas – Offers Flexible Gas Contracts
At Niccolo gas, we are always on the lookout for new ways to save our customers money.
This is the driving factor behind our new product offering – flexible gas contracts. By putting our many years of energy industry experience centre-stage we can exploit movements in the wholesale energy market, procuring cheaper energy and a cheaper price for our customers.
We do recognise that flexible gas contracts are not for everyone! That is why if you want to remain on your current contract, nothing will change for you.
By adding flexible gas contracts to our product line-up we are taking another step towards a better, brighter, and fairer UK energy industry.
If you are interested in this new product offering, then you can read through our Niccolo Gas blog to learn more.
If you decide you’d like to proceed or have questions for one of our energy experts then do not hesitate to call us all throughout normal office hours at 0131 610 8868.
Or, if you’d prefer to get in contact online you can use the following:
We look forward to hearing from you!
What are flexible energy contracts?
Flexible energy contracts allowing customers to spread out the purchasing of their energy along the period of their contract, with the wholesale energy market
What are fixed energy contracts?
Fixed energy contracts are nothing new – it is the most common form of utility contract, with an agreed upon price lasting the duration of your contract. It is most likely the energy contract you are on.
Are flexible contracts cheaper than fixed energy contracts?
Not always. As the wholesale market influences the price of energy in flexible contracts, and as this market shifts in both directions, you are just as likely to end up paying over the odds as you are getting a great deal.
What is the cheapest contract option?
As always, there is no way of telling what contract type is the cheapest for your business without assessing your consumption, scale, operational nature etc. If you want to find out what the cheapest energy contract available to you is, it may be worthwhile speaking to a broker.