Flexible contracts are all the rage right now. Most commercial customers seem to enjoy the thought of beating the market, betting that they’ll gain a better price by not fixing their price at this moment. More importantly, commercial customers seem to love the thought of ‘beating’ their competitors to a competitive edge by securing far lower energy prices.
We love them too, we won’t lie. For too long the wholesale energy market has had its benefits solely exploited by large buyers and sellers, with very little benefit being passed on to consumers.
Not now. Now, everybody has access to these benefits.
But are flexible contracts the best option for everyone…?
Traditional Fixed Contracts
Fixed Contracts are the contract type that I daresay most of us will be familiar with.
It is the more common contract type within the UK, for its simplicity and ease of use.
Customers are shown a unit rate price that will remain consistent throughout the entire term of the contract. This means that if you are shown a price of 5p per kWh, you will pay 5p per kWh for every unit of energy you consume during the term of your contract. Often these contracts will also have standing charges or other fees to be aware of, but these vary from supplier to supplier.
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 main bulk of demand and is the predictable portion of the customer’s energy. Most businesses will be able to provide 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.
Flexible and Fixed in a nutshell – summary
For anybody averse to reading large bodies of text, we’ve created this short summary section of the last two sections to refer back to when needed.
- A set price for every gas unit you use.
- The quoted price remains fixed for the duration of your contract.
- Wholesale gas is purchased in small chunks throughout the entire 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.
Key Consideration Points
For anybody that has reached this point in the article who is beginning to feel a sense of dread that they have been stuck on the wrong contract for the last X amount of years, don’t panic just yet.
Save it for after this section.
This is the point in the article where we break down the related pros and cons between traditional fixed-price contracts and flexible contracts. If anything, this section should help clearly see the strongest arguments for each contract type.
- Budget certainty through securing a fixed price for gas
- Enables accurate forecasting and effective cost management
- 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
- 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
- Able to spread out the risk of purchasing energy throughout 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
- Comparatively risker contract option due to the nature of the wholesale energy market (price volatility)
There are distinct pros and cons for each option. The most important thing is to find what is most valuable to you.
It may sound a little like a broken record by now, but flexible contracts are not for everyone. It is something we will keep repeating because not enough people know it!
The equal potential for price to rise as it is to plummet causes many pragmatic businesses to choose fixed contracts over flexible. What is often overlooked is that there is still a risk factor involved with fixed contracts!
Many see flexible contracts as inherently riskier because of the multiple purchasing points, but this can be mitigated with a sensible purchasing strategy. Have a read of our article here for some analysis on the attitudes of the biggest energy buyers in the UK.. (Insert link to ‘What rules Do Niccolo Use when trading gas’
Not many customers there is a risk-premium built into fixed contracts to mitigate the risk faced by suppliers delving into the wholesale market. This means that your ‘fixed’ price is never truly fixed, as if the wholesale price rises for suppliers, they will simply raise the risk premium. Looks like fixed isn’t truly fixed…
One of the reasons why flexible contracts are more suited to larger businesses is due to whether external support is needed or not. If you do not have access to an external support source, or a specialist internal department – you could be left trying to gauge whether the market is truly low or not. For this reason, flexible contracts are really only worthwhile if you can afford the employees to complete extensive market research, have the operational scale to maximise savings or have a source of external support.
Billing validation is another important asset to have when tackling flexible contracts. With autonomy comes complexity, and experts are needed to catch any billing errors. If you do not have the capabilities for this in your business, or an external source of help – then flexible contracts may not be suitable for you.
Need a little guidance on your decision?
We recognise that it is difficult to make a decision like this when you may not know everything there is to know about either option.
Luckily, we do!
At Niccolo Gas our trained energy experts know everything there is to know about UK utilities and energy supplies. If you’re left a little bit confused about what to do for your next supply, flexible or fixed, we are in a great position to advise you – ensuring the best outcome for you and your business.
We look forward to hearing from you!
How to choose between flexible or fixed contracts?
The most important thing when choosing between fixed and flexible contracts is to consider what is most valuable to you. Is your business going through some turbulent times, and would benefit from improved financial forecasting? Fixed is maybe a better option. Your business recently grown massively and financially very strong? Maybe a flexible contract, higher risk higher reward approach.
Should I choose a flexible contract?
It depends what your current situation is. Flexible contracts can be incredibly beneficial for the right customers, but completely unsuitable for others. Look into the pros and cons of each and if you are still unsure, potentially speak to a broker or energy supplier for more information.
What is better, fixed or flexible energy contracts?
Neither! Fixed contracts benefit those who need higher degrees of budget certainty, while flexible contracts are great for those looking to get a competitive edge over competitors.