The majority of business energy contracts are what is known as ‘Fixed’, that is they run for a fixed period and at a fixed price. But there is another way for businesses to access the energy market.
Whilst it is more involved, more ‘niche’ and traditionally aligned to larger businesses there are some tangible benefits to be gained from entering a flexible deal.
How do flexible deals work?
In effect the ‘profile‘ or the ‘anticipated’ shape that the customer’s demand trend would look like is split or ‘blocked’ into two broad categories of shape. These are Baseload and Peak.
- Baseload is the rump of predictable energy usage.
- Peak is the spike in demand outside of the predictable rump. This peak forms the ‘traded volume’ that the customer can trade in their flexible deal.
The wholesale energy market trades such volume in set blocks. Because of the individuality of a business’ usage, the match up between these blocks and the customer profile will not be perfect.
As a result the customer will buy a block of energy which may in parts exceed their usage profile, for instance their business may ramp up activity earlier than the traditional energy block starts.
All is not totally lost however as where the purchased baseload and peak volumes exceed the customer’s profile this can be sold back to the supplier.
Conversely where the customer’s volume purchases are insufficient to cover their demand profile the customer will need to purchase extra volume in smaller blocks.
These ‘buys’ and ‘sells’ then average out to form the overall residual price or in other words the energy price the customer will pay for any given period.
The Benefits of entering a flexible business energy contract
A flexible contract:
- Enables the customer to only lock in some of the costs at one time, providing scope for costs to fall if the market falls over the contract period.
- Enables the customer to lock in prices at any point during the contract term for all or part of the period. When an attractive price appears, this can be exploited within the existing contract unlike in a fixed price energy deal.
- Reduces the relative risk of a fixed price energy deal which requires the locking in the entire contract at a set price
- Provides the opportunity to sell the contracted energy back to market and start again. This can be potentially repeated continually like any other trade and can theoretically be used to both hedge risk and generate income.
The Drawbacks of entering a flexible business energy contract
A flexible contract:
- Is an involved process and often requires complex purchasing decisions and detailed knowledge of the market and its working
- Requires tradable volumes to be significant in order to access the market at reasonable prices. As a result such products only suit larger businesses who have transparency over their volume and profile of usage or groups of smaller businesses who have this forensic energy management done for them
- Requires a Half hourly meter or smart meter to be fitted as regular, accurate readings are essential to making a flexible deal manageable and effective
- Exposes the customer to risk. Markets can go up as well as down. The customer could be significantly better off or significantly worse off. There is no fixed price certainty until the customer decides it and without the relevant focus and safeguards by that point it could be too late to avoid some exposure.
- The price will be subject to a traders’ premium. As with fixed prices, traders will add a premium to prices that are for a period further out in time (“down the curve”) as these are faced with more uncertainty than immediate prices. Of course immediate prices also carry a premium as the purchaser needs them with urgency and the seller can optimise their return when recognising this. Whilst this risk is built in and largely unseen in a Fixed Price contract it is more apparent and more sensitive to variances in Flexible Price contracts.
Given the above, Flexible Priced contracts are clearly not for everybody by any means but with the advent of smart metering and the promise of smart grids variations on this theme will become more prevalent.
However if your business has the volume, profile, manpower, expertise and appetite for risk to manage and sustain a flexible deal then it is a very attractive way to go.
Management is key however as a poor decision or no decision can have a very significant effect on cost, a risk you avoid with fixed price deals.
If a flexible deal sounds attractive for your business or you would like to find out more about our business energy deals simply call us on 0800 051 5770, we’d love to hear from you.