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.
While all of this is great, there are a few factors which can be detrimental:
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.
Hedge your energy – similar to market trends, you can buy energy at different points throughout your contract which means you have less exposure to high energy prices
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.