All businesses are different and are happy to take on a different level of risk when procuring their energy. For larger consumers, the product choice seems endless and it does sometimes mean that the presentation of the costs of your energy going forward are difficult to compare. People do tend to understand their choices as being a simple either/or option, but energy supply contracts exist along a risk continuum from high risk to no risk. Below are the broad categories and roughly how they work but within each category there are options that are more or less refined.
Flexible purchasing allows you to control the amount of energy you buy and when you buy it. Energy can be bought in seasons, quarters, months, or even for the day ahead. Most typically, buyers will commit to buying a base load with top up purchases throughout a contract period. Fully flex contracts also allow for full transparency on non-commodity costs, and supplier administration charges.
Clearly the intention is to take advantage of movement in the wholesale energy market to minimise energy costs.
These types of contract are only open to very large consumers where the traded quantities are significant, smaller users may be able to benefit from a partially fixed product with defined purchase options.
Some suppliers offer partially flexible contracts that present a lower level of risk than the fully flexible products. Partially flexible contracts will offer a range of options and a range of buying strategies within those options. The critical difference is the ability is to be able to set budget parameters on price and/or identify predefined purchase points where the buying will take place.
Pass-through products allow you to fix your energy costs but accept the distribution costs, transportation costs, balancing costs and charges associated with the Levy Control Framework at the rates charged to the supplier. The advantage is no premium is added by the supplier to cover potential changes throughout the contract period. There may be a small saving in this and if charges do not increase to the anticipated amount then clearly the savings will be more significant. The caveat as always is that cost can go up as well as down.
It is also important to know that in some areas the distribution costs are much lower than in others and fully fixed contracts tend to be priced based on an average cost. Getting to grips with the costs in your area is important when comparing pass-through options with more traditional contracts where the costs are fixed.
Fully inclusive options mean the energy costs are fixed and all non-commodity costs have been included within your prices. This still holds some risk as the non-commodity costs are not fixed for the contract duration. The risk however is much lower than a flexible product because the energy costs are fixed. Most usually, if the non-commodity costs change during your contract period the supplier will pass the increases on. Some suppliers will only pass these costs on if they were above a built-in threshold. Again, it is important to know precisely what level of risk this might entail when you are comparing costs.
Fully fixed products carry no risk at all. All the risk is with the supplier. The supplier will price fix the energy costs and the non-commodity costs for the entire duration of the contract. Your prices will only be subject to change if there was a change in law or to your meter. If the energy costs or the non-commodity costs were to decrease during your contract period, you would not benefit from those changes and you would be required to pay the agreed rates for the entire contract period. On the other hand, if they were to increase you would not be subject to these changes either.
Making your choice
Comparing different products means weighing up the costs and potential changes to costs throughout the contract period. It is imperative that you make that decision when you have all of the facts and possibilities at your disposal. Gathering the information and developing your options and forecasts takes time and expertise, it is possible to do this for yourself by dedicating internal resources or by contacting a reputable energy consultancy firm such as Power Direct Ltd in order to prepare the options and comparisons and risk assessment for you.
It’s all about what is right for your business and your energy needs, and whether you are most concerned with predictability or you want to expend energy on driving the cost of energy down, albeit with greater levels of risk. If you are using a broker or consultant you should discuss all of these options with your account manager before going to market.
If you would like to speak to us about your energy contracts or anything else to do with business energy supply, whether you are currently a client or not, please don’t hesitate to contact us.