An alternative to fixed prices: the flexible price contract…
With energy prices at all-time highs I am sure the below dilemmas will resonate with you:
• Prices are sky high, but longer term contracts are cheaper. Is it better to pay a higher price for a 12m contract, and hope that next year will have improved significantly, or go for the cheaper longer term contract now?
• Prices are volatile, how do I decide which day to sign the renewal contract on?
• Fixed Prices give me price peace of mind, but are so expensive.
• Flexible Prices are attractive, but I don’t have the resources to make multiple contracting decisions each year.
• Securing my organisation’s energy contract is becoming too time consuming and difficult.
Whilst no individual organisation can control what is happening to energy prices across the globe, it is each organisations responsibility to respond to the current crisis as effectively as possible. We partner with our customers to help navigate the energy market challenges.
With unprecedented volatility and price increases, suppliers are exposed to an ever increasing amounts of risk when they offer their customers fixed prices. A quick review of the headlines from 2021/22 and you will find a long list of suppliers who failed, or intentionally exited the UK energy market in large part because they were over exposed and did not have a comprehensive hedging position. When there is more risk in the market, the supplier has to add more risk premium to their prices in order to cover potential price hikes throughout the customer’s contract term. A reasonable estimate would be a 25% premium on commodity costs in order for a supplier to offer the end consumer a fixed price.
In very simple layman’s terms:
• Fixed prices mean the supplier bears all the risk, and that risk premium pushes up the price to the end consumer.
• When there is more risk in the market, the supplier has to add more risk premium to their fixed prices in order to cover potential price hikes throughout the customer’s contract term.
• A reasonable estimate would be a 25% premium on commodity costs in order for a supplier to offer the end consumer a fixed price.
The Flexible Price Contract
We have listened to our customers concerns and are pleased to offer a flexible priced contract that will help minimise the above issues. Flexible prices mean the consumer bears the risk, so the price will be lower at point of securing the contract, but the commodity price will fluctuate with the market. Historically the more flexible type products have been the realm of the largest energy consumers, those that could dedicate a staff member to monitor and interact with the energy market. That is starting to change, as customers small and large seek alternative contract solutions in this challenging energy market.
In brief, with the “Flagship Flexible” product you fix the non-commodity costs on yearly delivery windows. Then, throughout the year, energy traders buy in the commodity at the current market screen price, i.e. without the risk premium. Obviously the commodity cost element can fluctuate. The logic behind this option is that suppliers have to add in a lot of risk premium to the commodity price when they offer you a fixed price. You remove that risk premium with this Flagship Flex product, as the commodity costs will be bought by the trader when they see competitive opportunities to do so. Commodity costs could be bought on a month to month basis in times of elevated prices, or for quarters and seasons when prices dip. You are not making the trading decision yourself, so don’t worry about extra workload. You get the benefit of a flexible type contract, but without the need to monitor and make multiple purchasing decisions. Furthermore, you no longer have to worry about picking the best time to sign a contract, as traders will secure as and when opportunities arise. This approach enables consumers to avoid locking in a full term contract at a peak.
With this product you will benefit from:
• Commodity Cost risk premium is removed from the price.
• No need to time your contract signature date to when the market is down, as commodity prices will be locked in as and when there are opportunities to do so.
• Minimum commitment of 36 months.
• Less workload, as you do not have to tender and renew each year. Assuming you have not terminated, it automatically extends each year up to five years.
• Renewable energy.
• Reduces customer workload, stress and administration.
• You can run your business, whilst a professional energy trader runs your energy purchasing.
• For larger consumers there is the option to purchase and sell back energy should those market conditions be favourable.
• Spreading your contract risk, so you are not penalised should your contract fall due for renewal when prices are high.
When buying at market price you eliminate the need to compare multiple suppliers for price. You are buying at screen price, not a supplier’s interpretation of where the price is. This saves you time and administration burden as by default you will go with the supplier who has the ability to offer this kind of product for your kind of meter. The price is market price, so you are opting for the supplier with the capability to service and support this kind of contract for your meter and usage profile.
Who is the product for?
This product is not for everyone. If you need a 100% fixed energy budget then you will be better off choosing one of the supplier’s more fixed type products. But if you did opt for this product, you might be asking: What will I pay? The billed rates will be made up of the following components:
• Commodity Rate – will be bought in at screen price, monthly/quarterly/seasonally as dictated by market conditions.
• Losses – Confirmed monthly to cover losses from power station to customer meter.
• Shape Fee – Fixed for contract durations, bespoke to customer’s usage shape.
• Non Commodity – set annually a month ahead of each annual delivery window.
The Flagship product has proven time and again to be able to offer flexible type contracts to customers who would normally fall below the suppliers minimum consumption threshold for flexible type products. Additionally the Flagship product is also much more agile than supplier flexible products. For example with the Flagship product the trader has the option to make multiple purchases in a given month, offering more opportunities to interact and take advantage of market conditions when they present themselves, further increasing the competitiveness of the product.
Please get in touch if you would like to consider a flexible price contract for your next renewal. We can compare this option against your current supplier’s more traditional offering so you can make an informed decision. We are here to help, get in touch today.
