Most business energy deals are on a fixed term fixed price basis enabling the customer to lock in a price for a given period.
This brings a level of certainty and predictability to their energy costs however there are some drawbacks not least that the locked in price means the customer cannot take advantage of any beneficial market movements during the contract period.
The benefits of a fixed price business energy contract
- Requires just one purchasing decision in your renewal window
- Provides just fixed unit prices for the entire length of the contract
- Is largely hassle free, you pick your price and your contract length and can then be sure this will not change allowing improved cash flow management and budget certainty (as long as you keep on top of meter readings)
The drawbacks of a fixed price business energy contract
- Provides the purchaser with no visibility or control over optimising these prices. Once the deal is entered, that is the energy price you will pay until your contract ends, no matter how the market moves in the meantime.
- The price will be inflated at the point of the deal – The wholesale market contains built-in premiums for forward contracts (1,2,3 years ahead) as traders price in potential future risk from unpredictable events (invasion of Ukraine, Opec warnings etc)
- Assumes the amount of energy consumed in winter is higher than in the summer as darker nights, and colder temperature increase demand. The fixed price takes account of this trend and automatically skews volume to the higher priced winter periods regardless of how you actually use your energy.
- Assumes there is a significant difference in demand for a working weekday and for a weekend, whilst weekdays are broadly similar, weekend volume is significantly lower. Again the fixed price will skew volume to the higher priced peak weekday period regardless of when you actually use your energy.
- Is based on a typical business consumption profile which assumes demand is at its highest in the middle of the day. The profile being the ‘anticipated’ shape a typical customer’s demand trend would look like. As well as winter and weekday premiums, prices are also higher in the daytime and actually peak at lighting up time. As the anticipated peak of business usage corresponds with this peak period, the fixed price is again skewed to the higher priced periods
- Not all elements of the price will necessarily be fixed for the entire contract period, to understand this more visit our guide to Are fixed deals really fixed?
In conclusion, fixed prices are a great way to access the business energy market with a level of certainty. They are the most popular product for a reason – they work. But in order to provide this level of certainty to the customer, the energy supplier needs to forecast against generic assumptions and add a ‘risk’ price into the equation.
The result is often a premium to the sum of the constituent parts.
The alternative method, a Flexible Price, is a more involved purchasing decision and isn’t right for everybody.
On balance then for most businesses fixed deals are the way to go. It is of course essential however to negotiate the price down to a competitive level, as you would expect with any commodity. In addition another key element is keeping control of your meter readings, and ideally fitting a smart meter to accurate as possible billing and cash flows for your business.
If a fixed energy deal interests you we’d love to hear from you, simply give us a call on 0800 051 5770 and we’ll get to work on your behalf straight away.