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.

Overview

  • Choose fixed or flexible energy tariffs 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 wholesale 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.

Unlike domestic customers who may be protected by a government-imposed price cap, most business energy contracts are not subject to a price cap, meaning procurement strategy plays a crucial role in managing costs.

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.

Businesses must also consider how their chosen energy supplier structures contracts for gas and electricity, as terms and pricing mechanisms can vary significantly.

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.

Some organisations may prioritise securing competitive energy deals, while others focus primarily on risk mitigation and cost stability.

In this blog post, we’ll explore both 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 differs from standard variable tariffs, where rates can rise or fall depending on broader market conditions and supplier pricing policies.

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.

However, businesses should check contract terms carefully, as some agreements may include exit fees if you terminate the contract early.

Pros of Fixed and Fully delivered Energy Contracts

  • Budget Certainty: Fixed rates mean no surprises on your energy bills, regardless of market fluctuations. Meaning protection from sudden wholesale spikes that could impact gas and electricity costs.
  • 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.

It’s also important to compare available energy deals carefully before committing, as market timing can significantly affect your contracted rate.

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.

These arrangements are different from standard variable tariffs typically offered in the domestic market, as business flexible contracts are structured around wholesale trading strategies.

Wholesale market prices can fluctuate due to a variety of factors like supply and demand dynamics, geopolitical events and changes in regulations.

Flexible 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.

Unlike fixed agreements, businesses are not shielded by a price cap and must actively manage exposure to market volatility.

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 wholesale 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. Thus, offering the opportunity to secure competitive energy deals across different purchasing windows.

Good to know about Flexible Energy Contracts

  • Although flexible energy tariffs 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 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. As with fixed contracts, businesses should review supplier terms carefully, particularly regarding exit fees or changes in supply arrangements with their energy supplier.

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 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 tariffs 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.

This proactive approach can be particularly beneficial when managing large gas and electricity portfolios.

Considerations for Fixed and Flexible Energy Procurement

  1. 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.
  2. 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.
  3. Market Knowledge: Flexible contracts require a good understanding of wholesale 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. Working closely with a trusted energy partner can help you assess available energy deals and structure contracts that align with your long-term objectives.

In the UK energy market, both types of 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.

This is particularly important in a market without a universal price cap for businesses, where strategy and timing significantly impact outcomes.

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.

We also help businesses review energy deals, assess supplier terms including exit fees, and build strategies for managing gas and electricity procurement effectively.

With a century of combined experience in carbon and energy strategy, EIC Partnership is here to help you manage today and plan for tomorrow.

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EIC Partnership is the trading name for:

Energy Intelligence Centre Limited

Registered Number: 11899462 | Registered Address: 7-9 Stafford Road, Wallington, SM6 9AN | VAT Registration: 318 2851 01

ESS (Utility Consultants) Limited

Registered Number: 06585789 | Registered Address: 7-9 Stafford Road, Wallington, SM6 9AN | VAT Registration: 679 9865 35

The Monarch Partnership Limited

Registered Number: 04346309 | Registered Address: 7-9 Stafford Road, Wallington, SM6 9AN | VAT Registration: 793 6132 10)