When it comes to deciding your energy contract, there is no “one size fits all”.
Every business has their own needs and requirements. If you’re a local corner shop, you’re going to differ significantly to a large manufacturing firm with numerous plants.
Before committing yourself to any long-term deal, it’s imperative that you fully understand every avenue available to you.
There are two separate options available: ‘Fixed Rate’ and ‘Flexible’ contracts. If you’re like most businesses out there, you’ll be looking for a Fixed Rate contract, but with varying options available, it’s best to know which one is right for you.
Fixed Rate
Standard Fixed Rate
The simplest, and for that reason, most common option for businesses. With a fixed rate contract, you agree all your total energy costs upfront, safeguarding you from unexpected price hikes in the energy sector.
They are favoured by those businesses who prefer the long-term predictability they provide. If you’re a business owner, you can forecast your energy budget for the duration of your contract, allowing you to focus more attention on other areas of your business. If you’re an energy manager, you can report to those above you with accuracy and confidence.
So, are there any limitations with a fixed contract? The answer, as you’d imagine, is yes.
Whilst they provide protection against future energy price rises, it also prevents you from taking advantage of any falls in the market. This same theory applies for businesses who have signed up to a fixed rate contract on, unknowingly, a high rate. This can often prove troublesome when attempting to renegotiate your terms, especially if an exit fee is included in deal.
Blend & Extend
Rare within the industry. The clue to the nature of these contracts is in the name. A blend and extend clause allows someone on a high fixed-rate contract to reduce their current price by agreeing to extend the contract for an additional term. This is great for businesses concerned with high energy rates at the time of their renewal.
Unlike a standard fixed rate contract, a blend and extend clause allows you to take advantage if there’s a price drop in the energy market. By renegotiating your contract at the end of the financial year, you can purchase energy in a way that enables you to save money now and spread the cost out over a longer period.
A word of warning however. Blend and extend clauses are notoriously difficult to negotiate, especially considering that suppliers will often have a limit of how many they can approve in one financial year. The clause is also only available to you if you’re in a deregulated market or buy energy from a third-party supplier.
Pass Through
Most suitable for businesses with the most control of their energy usage, for example, manufacturing firms. With a pass-through contract, you’ll agree to some, but not all the charges up front. The additional costs will be “passed on” to you depending on your usage patterns during national grid peak hours (17:00-19:00).
These types of contracts have seen businesses, especially those in the manufacturing and industrial sectors, ‘load shedding’ (also known as Demand Side Response). This involves the firm shifting energy consumption to an alternate time period outside of peak hours when prices are lower.
Remember, a pass-through contract is not suitable for every business. Always speak to an energy expert who can undertake a thorough analysis of your energy usage before you commit.
For those of you already on these type of deals, it’s important to note that from April 2018, DCP 228, a new regulatory change from Ofgem, will alter the way these charges are calculated.
Like we stated earlier, the majority of businesses will purchase their energy on a fixed rate, but, if you’re one of the few who feel it’s inappropriate for your needs, there is another option available.
Flexible
Flexible procurement is a method of purchasing your energy in large or small “blocks” prior to usage. The size of these blocks varies between businesses, with some ranging from seasons, quarters, months, weeks or – on some contracts – a day ahead. In some cases, businesses have even been known to make transactions as small as a tenth of a MW.
The approach itself is considered ideal if you’re a large business looking to mitigate risks in an often-volatile market, especially when energy takes up a significant proportion of your overheads. A business can exploit unusually low prices in the market by purchasing energy in bulk, thus eliminating higher costs further down the line when higher prices inevitably return.
Like every scenario, there are also risks involved. Whilst flexible purchasing allows you to benefit from these lulls, it also leaves you exposed if you become close to exceeding your usage limit (basically require further purchasing) while market rates are higher than normal. In layman’s terms, due to the complexity of this approach, it can either be significantly cheaper or significantly more expensive for the buyer.
Whilst the solution sounds simple, trust us, it isn’t. To undertake such a strategy, you would require an experienced advisor with the technical expertise to manage purchases effectively.
What next?
Signing a new energy contract is never easy, so we hope our brief overview above has provided you with some food-for-thought about where to go next. Remember, signing the wrong type of contract could have a huge detrimental impact on your business further down the line. So, before you make any decision, we’d always recommend speaking to an expert.
