In a fluctuating market, it can be difficult to be certain that your energy contract is the best and the most cost-effective version for you. Whether you value regularity, or are looking for an option that allows your organisation to react to the ever-changing market, this guide dissects the different types of contracts for business energy deals. By the end of the guide, you should be able to make an informed decision regarding the best energy contract style for your organisation.
Traditionally, businesses have used fixed energy contracts. These allow organisations to set a fixed price for their gas and electricity on any given day. They will then continue to pay this established price for the duration of the 1 to 3 year contract, regardless of any changes in energy values.
A fixed energy contract may appeal to you if you want to ensure budgetary certainty – your energy costs will (in theory) not change from month to month. This means that once you have agreed a price, you will not have to put much time into budgeting and managing your energy payments. So, if you are confident that you can ensure good timing when signing your contract, a fixed plan may suit your organisation if you prefer a hands-off approach.
By choosing a fixed energy contract, you may protect yourself from any price increases in the market. However, the opposite is also a risk. If energy prices dramatically drop during your contract, you will be overpaying for your supply.
Fixed contracts will also often sell at a premium, as your energy supplier needs to account for any risks associated with your contract, such as volume variations, credit risk and non-energy charges, such as transport charges and green taxes. You will also generally have to stay within the stipulated energy volumes of your contract, which may be problematic if your energy usage changes dramatically according from season to season.
You should also read the terms and conditions of your ‘fixed’ contract thoroughly, as usually they are not as fixed as they seems. Most suppliers maintain they they can ‘pass through’ any unexpected increases in non-energy costs during the length of your contract. Make sure you are aware of this risk before committing to the contract, and ensure you budget to ensure sufficient funds should such costs arise.
A flexible energy contract allows you to purchase energy in chunks throughout the length of your contract. Opting for this approach means you can choose and change the quantity of your energy, and buy it whenever you need it. This enables you to take advantage of fluctuations in the market – instead of sacrificing flexibility (and extra cash) for security and consistency, you can maintain control while saving money.
The main advantage of choosing a flexible energy contract is, predictably, the flexibility. You will not run the risk of overspending for your energy supply, and will not have to splash out extra on risk premiums. A flexible energy contract will especially suit you if you have larger energy volume requirements, with the added advantage that you will not face any volume restrictions.
However, flexible contracts demand a high level of alertness and an active approach. You have to be willing to constantly monitor the market and make decisions about when to buy your energy.
If you like the sound of a flexible business energy contract, but cannot commit to such a hands-on approach, working with an energy broker may be a solution. They will keep you informed about any decisions they are making on your behalf, and will manage the risks for you, eliminating the need for pricey risk premiums.