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Fixed vs. Flexible Energy Contracts: Which is the Better Deal for You?
Explore the differences between fixed and flexible energy contracts to determine which option best suits your business.
Rachael Thatcher
Head of Fixed Pricing
John Palmer
Director of Flexible Procurement
Overview
- Choose fixed or flexible energy contracts based on your business needs and financial strategies.
- Fixed contracts provide price stability and ease of budgeting, protecting businesses from market volatility with set rates for a specified term.
- Flexible contracts, on the other hand, offer potential cost savings and adaptability to market conditions, but require active management and market knowledge.
- The decision between fixed and flexible contracts depends on a business's risk tolerance and financial strategy; consulting an energy expert to navigate the complexities of energy procurement is recommended.
Navigating the complexities of energy contracts can be daunting for any business.
In the UK, the decision between fixed and flexible energy contracts is a significant one, impacting everything from budgeting to operational strategy.
It’s crucial to remember that every business is unique, with distinct energy needs and financial considerations.
Thus, there is no one-size-fits-all answer when it comes to choosing the right type of energy contract.
In this blog post, we’ll explore both fixed and flexible energy contracts to help you understand which might be the better deal for your specific business situation.
What is a Fixed Energy Tariff?
A fixed and fully delivered energy tariff involves paying a set rate for your energy use over a predetermined period, typically ranging from one to three years.
The rate does not change regardless of fluctuations in the market prices of energy.
This type of contract offers predictability in energy costs, making it easier for businesses to budget and plan financially without worrying about market volatility affecting energy costs within the agreed contract term.
Fixed energy contracts may be particularly appealing during periods of rising energy prices, as they can protect businesses from unexpected increases by locking in lower prices.
Pros of Fixed and Fully delivered Energy Contracts
- Budget Certainty: Fixed rates mean no surprises on your energy bills, regardless of market fluctuations.
- Simplicity: These contracts are straightforward and easy to manage.
Good to know about Fixed Energy Contracts
- While a fixed energy contract offers budget certainty, there is a lack of flexibility. This means while you will not be affected by energy price hikes, you will not benefit from any price drops in the energy market throughout the course of the contract.
What is a Variable Energy Tariff?
A variable energy tariff allows businesses to pay for their energy at a rate that can change based on market conditions and your risk management strategy.
Market prices can fluctuate due to a variety of factors like supply and demand dynamics, geopolitical events and changes in regulations.
Flexible energy contracts are more complex but offer the potential for significant savings, particularly if energy managers are adept at buying energy at lower prices when the market dips.
This type of contract can lead to lower costs during periods of reduced wholesale energy prices but can also pose a risk of higher rates when energy prices increase if positions are left open.
Pros of Flexible Energy Contracts
- Potential for Lower Costs: If managed well, you can capitalise on lower market prices.
- Flexibility: Offers the ability to adjust buying strategies in response to market conditions and business requirements.
- Multiple Purchasing Decisions: Unlike a fixed contract, a flexible contract allows you to purchase your energy through multiple trades at different times, rather than having to take a decision on a single day.
Good to know about Flexible Energy Contracts
- Although flexible energy contracts offer significant flexibility, there is also exposure to market highs and lows can lead to budget uncertainty. However, risk management measures can be used to quantify and limit these risks.
- Due to the complex nature of a flexible energy contract, it requires more active management and understanding of the market. An experienced account manager can help with this.
- Typically only available for larger customers with annual consumption over a certain threshold.
Which is Better: Fixed or Variable Energy Rate?
Deciding between a fixed and variable energy rate depends largely on your business’s risk tolerance and financial strategy.
Fixed energy tariffs provide peace of mind for the contract period and simplicity, making them ideal for businesses with tight budget constraints or those that prefer predictable costs for easier accounting and forecasting.
Flexible energy contracts might suit organisations that are comfortable with managing some level of risk with the aim of improving their price against the starting position.
This may involve setting limits on risk to avoid price spikes, but offers the opportunity to buy and sell energy to take advantage of prevailing market conditions.
Flexible contracts also allow for long term management of energy costs.
Beginning to trade energy for future positions allows a risk strategy to be set well in advance of delivery and offers the opportunity to optimise the position over time.
Considerations for Fixed and Flexible Energy Procurement
- Risk Appetite: If your business has appetite for risk and requires a high level of budget certainty, a fixed tariff may be the better option. Conversely, if you can handle some level of risk for the chance of lower energy bills, a variable tariff might be suitable.
- Financial Planning: Consider how crucial predictable energy costs are to your budgeting and financial planning. Fixed tariffs facilitate easier price forecasting, although with suitable support from your account manager flexible contracts will also allow accurate budgeting within agreed risk parameters.
- Market Knowledge: Flexible contracts require a good understanding of energy markets and the factors that influence pricing. If your business has access to expert advice or can dedicate time to energy management, this could influence your decision.
In the UK energy market, both fixed and flexible energy contracts have their merits, and the best choice depends on your specific business needs and circumstances.
Remember, one type of contract is not necessarily better than the other; it’s about what works best for your unique business situation.
The key is to understand your procurement options and select the right one for you based on your circumstances at the time the contract is secured. This may change over time.
Always consider consulting with an energy expert or broker to help guide you through the complexities of energy contracts and ensure you choose the best option for your business.
In the end, whether you opt for fixed or flexible energy procurement, the goal is the same: to manage your energy costs effectively and sustainably, supporting your business’s growth and stability in an ever-changing economic landscape.
How EIC Partnership can help you
EIC Partnership is dedicated to guiding you in selecting the energy contract that best aligns with your business needs.
No matter the type of contract you choose, rest assured that your account will receive the full benefit of our expert management.
Our highly experienced team will ensure you are well-supported, and with timely market intelligence reports, you will be equipped to make well-informed decisions that propel your business forward.
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Read MoreWhich suppliers does EIC work with?
EIC stands out from other energy consultancies because we’re completely independent.
This independence allows us to offer supply options from a wide range of energy suppliers, all of whom are unrelated.
Our energy advice is unbiased, giving you the freedom to make informed decisions for your business.
We have a proven track record of skilfully negotiating cost-effective contracts, ensuring you consistently get the best energy prices when you partner with us.
What if I am already with an energy consultancy?
If you’re already working with an energy consultancy, it’s a good idea to start exploring your options well in advance, preferably 18 to 24 months before your current supply contract expires.
It’s essential to distinguish between your energy supply contract and your energy consultancy agreement.
You have the flexibility to switch your energy consultancy while keeping your current energy supplier intact.
What happens after the energy procurement step?
Our comprehensive account managed service provides our clients with peace of mind throughout the entire energy procurement process.
When you choose our fixed energy procurement service, we’ll assign an account manager to you, someone equipped with the expertise and abilities to provide a customised solution that aligns with your unique needs and requirements.
The professionals who make up our dedicated procurement team are well-versed in resolving inquiries and skilled in engaging with energy suppliers to negotiate contracts on your behalf.
When is the best time to renew my energy contract?
The timing for transitioning to a new energy contract is flexible; you aren’t bound by a fixed schedule or renewal date.
Given the ongoing high volatility in the global energy market, it’s increasingly crucial to look beyond traditional renewal dates when contemplating a new contract.
