A Comprehensive Guide to Flexible Contracts

Feeling Flexible?

flexiblecontracts 1

Instead of the usual fixed costs paid for energy in most contracts, some suppliers offer flexible contracts. Flexible contracts are tailored to larger consumers.

The energy market is volatile; this means there are frequent, unpredictable price rises and falls. Flexible contracts allow businesses to take advantage of wholesale price movements, instead of fixed-term contracts wherein you pay one, pre-agreed fee for energy across the duration of your contract.

Flexible deals are a good idea for consumers with large energy volume requirements as their savings will have the biggest impact. These types of contracts are limited, and only available to businesses who consume a certain amount of energy a year, and the criteria is supplier dependent.

For example, with nPower businesses must consumer a minimum of 50 GWh per year, whereas with EDF businesses must consume a minimum of 30 GWh per year.

How do Flexible Deals work?

The profile (an anticipated shape that a customer’s demand trend would look like) is blocked (split) into two categories. They are referred to as Baseload and Peak.

BaseloadThe general, predictable energy use
PeakThe spike in demand outside of the baseload.
The peak forms the ‘trade volume’ that the customer can trade in their flexible deal.

The wholesale energy market trades energy in these aforementioned blocks. The individuality of a business’ usage may mean that the correlation between the ‘blocks’ supplied to a business and the business’ customer profile isn’t perfect. This means that a business on a flexible deal will buy energy that may, in some instances, exceed their typical usage.

This doesn’t mean that money is lost in flexible deals, however. Where a company’s purchased baseload and peak volumes of energy exceed their customer profile, the excess can be sold back to the supplier.

Conversely, when a customer’s purchased volume is insufficient to cover their usage, they will need to purchase additional energy from their supplier.

What are the Benefits of Flexible Contracts?

  • They allow complete transparency for the business regarding the components which make up their energy bill.
  • They allow businesses to separate the non-commodity charges and other third-party charges from the cost of purchasing wholesale energy blocks.
  • A business can take advantage of costs reducing should energy prices fall during the contract period.
  • Customers can ‘lock-in’ prices at any point during the contract term for all or part of the contract. This means when an attractive price appears it can be exploited for longer!

What are the Drawbacks of Flexible Contracts?

  • Often the businesses require a dedicated, employed purchasing team as the contract requires complex decisions and detailed knowledge of the market and how it works; this can be expensive.
  • The consumer is exposed to risk; the market can go up as well as down. There is no certainty or stability unless prices are locked in.
  • The price paid is subject to a trader’s premium, which is an added price on top of the wholesale energy.
  • They require the installation to a smart or half hourly meter as accurate readings are essential.

Are Flexible Contracts for You?

As you can see from the above, flexible contracts are not for everyone. However, the growing appeal of smart meters and the promise of smart grids variations in the future suggest that they will become more prevalent.

Your business should have:

1. suitably high volume of energy consumption,
2. capable manpower to manage the trading,
3. expertise and confidence within the energy market,
4. favour and freedom for risk

and, if it does, then flexible contracts are probably a very attractive choice of energy supply.

What to Look for in a Flexible Contract

So, you have decided you may be interested in pursuing a flexible contract. Here is a quick overview of what you should be aware of when assessing quotes:

WHAT TO LOOK FOREXPLANATIONQUESTIONS TO REFLECT ON
Length of ContractContracts can range from 1-5 yearsLonger duration of contracts provides optimum trading opportunities.
Longer contracts risk leaving you in an unbeneficial situation for a long period
of time.
Non-Commodity
Charges
Non-commodity costs can be fully or partially fixed or can be passed through at cost.Having all, or at least some, of the demand related charges pass through will reduce premiums.
Choosing to do this will increase the complexity of your invoices as the contract is transparent; this may generate more work for a purchasing team.
Trading FlexibilityThe commodity element of your costs may be small, but it is the part that can earn you the most capitalSome suppliers charge trading transaction fees which can result in additional costs over the contract duration, so should be factored into supply negotiations to make sure you maximise on trading as much as possible.
You should be sure of your preferred trading strategy and ensure your contract offers you the required level of flexibility.
VolumesIncluding accurate volume forecasts allow a supplier to provide the most suitable contractIf there are any planned or known usage changes due to occur in the future, it is important to consider these.
An accurate understanding of usage benefits budgeting predictions
AdministrationIt is important to consider your company’s requirements regarding payment terms, invoicing and data access when choosing a supplierSome suppliers are more flexible than others regarding administration.
There are variations in what a supplier can offer in terms of data access. This may mean you can access to consumption data or invoices through dedicated contact, or perhaps a virtual portal
Negotiation and
Analysis
Suppliers will charge specific fees for managing a contract.
Suppliers may offer different premiums e.g. for renewable energy
It is important to compare offers in order to secure the most competitive and suitable contract.
The aim is to procure a competitive contract, that meets your company’s usage profile, whilst offering you your ideal level of trading flexibility.

For more information about this post and how Energy Solutions can help with your Electricity, Gas, or Water, click on the links, or check out the contact details at the bottom of the page.