Fixed or Flexible Energy Procurement

When it comes to buying business energy there are two key procurement strategies – fixed and flex. There are many ways that these can be utilised and actioned, but those two categories are what it always boils down to.

Picking a procurement strategy relies on a strong understanding of the options available to you. At amber energy, our award-winning procurement team will always run through each option to highlight the risks and advantages.

But in the name of transparency, we’ll break down everything you need to know in a quickly digestible way.

What’s the difference between Fixed and Flexible Energy Procurement?

The clue is in the name here, with ‘Fixed’ and ‘Flexible’ referring to how you purchase units of energy.

Fixed Procurement allows you to purchase all your energy for the contract term at one set price which will carry the length of term.

Flexible Procurement lets you buy energy in smaller chunks throughout the length of the contract giving you the ability to choose how much and when you buy your energy.

There are pros and cons to both strategies, with the biggest deciding factor being your appetite for risk which we’ll explain in more detail below. Before we do that though, let’s take a more in-depth look at both procurement strategies.

Everything You Need to Know About Fixed Energy Procurement

As mentioned above, Fixed procurement provides a static price on your energy throughout the duration of your contract term. There are both benefits and limitations to this type of purchasing, let’s start with what makes Fixed a good strategy:

Contract Length – with a fixed contract, you pick how long you want your contract to run for. This could be 12 months or five years, although typically it tends to be around 24 months.

Fixed Pricing – your unit rate will stay the same throughout the length of your contract, this means no price hikes or unexpected bills as the supplier takes on this risk.

Budget Certainty – having a fixed prices and contract term provides you with budget certainty, making it easy for your business to predict the price of energy bills.

Price Changes – while a fixed price does protect you from any increases, if the price of energy goes down you’ll still be paying the higher rate. This does mean that if you purchase energy at a point when the market is high then you could end up paying over market rates for the duration of your contract. Also, when fixing pricing it normally just

Risk premiums – there are certain factors that suppliers look to protect themselves against, such as volume variation or increasing non-commodity prices. In order to protect themselves from this they add a risk premium on fixed contracts which can be significant on long term contracts.

Pass Through Costs – the supplier may fix the wholesale cost of energy but pass through the non-commodity costs, which can make the price look cheaper initially, but you may end up paying more if the price of non-coms goes up during your contract term. You can choose to fix non-commodity costs as well, although this does tend to come at a premium.

Everything you need to know about Flexible Energy Procurement

Flexible energy contracts are the polar opposite of fixed, letting you buy your energy in smaller increments throughout the length of your contract. Similarly to fixed procurement there are pros and cons to choosing a flexible strategy, some of the benefits include:

Take advantage of market trends – the energy market is in a constant state of flux, but at one point in the year it’s the lowest it’ll be. By carefully analysing the market and strategically buying energy when the market is low you can benefit from cheaper rates.

Separate non-commodity costs – this allows for complete transparency on the wholesale energy costs, making it simple to break down your bill.

Risk control – the way you choose to trade your energy is entirely up to you, you can take bigger or smaller risks on your purchasing depending on how much risk you’re willing to accept.

However, Flexible energy procurement isn’t for everyone. Some things you also need to consider before opting for this type of contract are:

You need experts – it takes a lot of skill and understanding of the industry in order to successfully trade energy, if you haven’t got this knowledge in house then an energy management consultancy can help you. It’s important to have the right people with the relevant skills working on your account.

Have you got the volume – in order to trade flexibly, most suppliers require a minimum volume to be achieved, typically this is more than 1GW per annum. Similarly, this strategy relies on half hourly meters in order to be delivered.

Risk – even with risk control in place, you are open to much greater risk if it’s not managed efficiently. If you mis-predict the market and buy all your energy at a higher price then you face the same problems faced with a Fixed strategy.

Let’s talk about risk

Typically, the greater the risk, the greater the reward, however, the one doesn’t necessitate the other. For example, a fixed strategy may be perceived to be low risk, as all your energy is procured at once but if this is not done at the right time of year then the reward can be marginal or even non-existent.

Risk isn’t so much a case of whether you opt for fixed or flexible energy procurement strategies, but how you approach your energy purchasing. This is the core of what risk management is about.

Managing risk can be difficult, as if you get it wrong you won’t have the expected return but getting it right could result in a potentially higher reward.

There are many measures that we put in place to help negate the potential risk, such as introducing a trading cap, implementing sell back options and implementing hedging cover. We also work closely with the suppliers to allow for unlimited volume tolerance to eliminate risks for rapid expansion or increased/ decreased consumption.

Looking to maximise your energy advantage?

Our expert energy trading and risk management team can help your company to reduce the cost of your energy by taking advantage of market trends using advanced software, in-depth analysis and years of experience.

We work carefully with you to meet your exact requirements, finding a supplier that perfectly matches your needs and choosing energy procurement strategies that meet your appetite for risk.

If you’re ready for a personal, simple approach to business energy then talk to us today.

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How Fixed Energy Procurement Works in Practice

In a fixed contract, the supplier calculates a single unit rate that will apply for the entire term. This rate is based on the wholesale market price on the day you agree the contract, plus a risk premium to cover the supplier against future market volatility. The supplier then hedges the entire volume of energy you are expected to consume over the contract period, locking in the cost of that energy on the wholesale market at the time of signing.

Once agreed, your unit rate remains unchanged regardless of how the wholesale market moves. This means you know exactly what you will pay for each kWh of energy you use, although your total bill will still vary depending on how much energy you actually consume. For businesses that value budget certainty and want to avoid exposure to market fluctuations, this is often the preferred approach.

How Flexible Energy Procurement Works in Practice

Flexible procurement works differently. Instead of buying all your energy at once, you agree a contract structure with a supplier that allows you to purchase energy in tranches over time. You might decide to buy 25% of your expected volume six months before the contract starts, another 25% three months before, and the remainder closer to the delivery period. Each tranche is priced at the prevailing wholesale market rate at the time you buy it.

This approach gives you the opportunity to benefit from falls in the market, but it also exposes you to the risk of prices rising. To manage this, many businesses work with an energy consultant or broker who monitors the market and advises on when to buy. The key is to have a clear purchasing strategy and to stick to it, rather than trying to time the market perfectly.

Comparing Fixed and Flexible: A Side-by-Side View

To help you decide which strategy might suit your business, here is a quick comparison of the main features:

Price certainty: Fixed gives you a known unit rate for the whole term; flexible means your average rate depends on when you buy.
Budgeting: Fixed makes budgeting simple; flexible requires more sophisticated forecasting and tolerance for variation.
Market opportunity: Fixed locks in the current price, good or bad; flexible allows you to buy at lower points if you time it well.
Risk exposure: Fixed transfers market risk to the supplier (for a premium); flexible keeps that risk with you.
Complexity: Fixed is straightforward; flexible needs active management and often expert support.

Ultimately, the choice comes down to your organisation’s risk appetite, the volume of energy you consume, and the resources you have available to manage your energy purchasing.

Key Considerations When Choosing a Procurement Strategy

Before deciding between fixed and flexible, it is worth thinking about a few practical factors. First, consider your energy volume: flexible contracts typically require a minimum annual consumption of around 1 GWh, so smaller businesses may not have that option. Second, think about your internal capabilities: do you have the time and expertise to monitor the market and make purchasing decisions, or would you need to rely on a third party?

Also, look at your business’s financial resilience. If an unexpected increase in energy costs would cause serious problems, a fixed contract might be safer. On the other hand, if you can absorb some volatility and want to avoid paying a risk premium, flexible could be more cost-effective in the long run. Many businesses also choose a hybrid approach, fixing a portion of their volume and leaving the rest flexible, to balance risk and opportunity.

Getting the Most from Your Energy Procurement

Whichever strategy you choose, there are steps you can take to improve the outcome. Start by understanding your consumption profile: when do you use the most energy, and how consistent is your demand? This will help you negotiate better terms and avoid volume tolerance penalties. It is also wise to review your contract well before it ends, as leaving it to the last minute can limit your options and push you into a less favourable deal.

Working with an experienced energy consultant can make a significant difference, especially for flexible procurement. They can help you develop a purchasing strategy, monitor the market, and execute trades at the right times. For more insights on managing your energy costs, you may find our article on 5 Insider Tips to Keep Utility Costs Low useful, or explore the latest trends in the Energy Industry News & Blog.

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