What type of contract is a good fit when prices are expected to fall?

Flexible or Multi-Purchase contracts are the perfect contracts to secure when prices are falling.

Historically, Flexible of Multi-purchase contracts were reserved for the largest of energy consumers, those using more than 10GWh per year, with sufficient resources to have an in-house dedicated energy manager responsible for commodity purchases. In essence, the larger the consumer, the more tools they had at their disposal to navigate a high price and volatile energy market.

With the recent energy price crisis, our customers are forgoing the need for budget certainty in favour of smarter energy budgeting. We have challenged the market status quo, and are pleased to be able to offer Flexible and Multi-purchase solutions to medium sized energy consumers. Now your organisation only needs an annual consumption of around 500,000kWh (0.5GWh) per year to be a candidate for a Flexible or Multi-purchase contract. Plus, you don’t need to have an in-house energy manager, using our Flexible or Multi-purchase contract grants you have access to an assigned commodity trader who will listen to your requirements and tailor a commodity buying strategy appropriate to your needs, one that is constantly adapted to the dynamic energy market. Securing a Flexible or Multi-purchase contract via Direct Power gives the medium sized consumer the same tool kit as the larger consumer when it comes to navigating and combating high prices and price volatility.

With a Flexible or Multi-purchase strategy you do not have to lock in a 12 month price whilst prices are high just because your renewal is due. You can combat the high prices and use market volatility to your advantage. Securing a Flexible or Multi-purchase framework is a more intelligent approach, reduces your risk exposure whilst enabling you to secure your commodity price as and when the prices dip. These contracts also remove all, or most, of the supplier’s risk element that can make up a substantial portion of a fixed price. In order to give you a fixed price, the supplier must include a risk premium in their quote to be able to honour the rates during market volatility. If you remove the risk by purchasing flexibly, or remove most of the risk by purchasing in multiple tranches, you eliminate or significantly reduce the need for a risk premium, which lowers the cost to the consumer.

If prices are softening, and your organisation does not require a fixed energy price, it is the perfect time to opt for either a Flexible or a Multi-purchase contract. The Flexible contract is discussed at length here and is perfect for the larger consumer who understandably does not want to lock in prices whilst they are elevated.

The Multi-purchase contract sits somewhere between a Fixed and Flexible contract. So if you are not quite ready to dip your toe in the waters of a flexible contract, why not consider a Multi-purchase? The beauty of the Multi-purchase option is that it can deliver the best of both worlds. In fact, with a Multi-purchase contract many customers opt to secure 50% of all their commodity volume up-front, essentially fixing half the commodity cost, and then purchase the remaining half as and when opportunities arise. With this strategy you achieve a hybrid result, a mix of Fixed and Flexi pricing, so you can have your cake and eat it when it comes to multi-purchase energy contracts. A Multi-purchase contract enables you to lock in rates based upon Period (e.g. months, quarters, years), and Tranches ( % of the period) e.g. you could lock in 50% of Spring 2025 in one trade.

A Multi-purchase contract is essentially a simpler version of a Flexible contract. If you secure the Multi-purchase contract via Direct Power, you have the freedom to make your own purchase decisions, or authorise our assigned commodity trader to manage the purchase decisions for you. Let’s face it, you have a business to run, so why not use the expertise and service of a commodity trader whose role is the monitor energy markets daily. By using this approach you remove any additional decisions and responsibility associated with Multi-purchase. After all, you don’t want your contract to add extra items to your to do list, you want the contract to work for you!

Key points on Multi-purchase contacts:

  • Max duration is 24m.
  • Minimum 500,000kWh (0.5GWh), annual consumption requirement.
  • All non-commodity cost elements are fixed for the duration of the contract except the commodity.
  • No shape fee.
  • 2 rate rather 1 rate.
  • Can trade commodity in months, seasons, quarters or annual blocks which do not have to be sequential.
  • Can trade up to 2 times for a certain period – only 50% each. i.e. you could trade 50% of Summer ’24 and leave the other 50% for a future decision.

Benefits of Multi-purchase:

  • Clean and simple.
  • Benefit when prices fall.
  • Outsource decisions to commodity trader allowing you to run your business.
  • Improved risk exposure management.
  • You choose how involved you want to be with the commodity purchase decisions.
  • No other costs such as shape fee or losses. Losses are included in the non-commodity.
  • No penalty for doing nothing, you simply default onto the month ahead default transfer price if you do not make commodity purchase decisions.
  • Can convert to a fixed price at any time by purchasing the full commodity volume if you decide you require price stability.
  • Reduces the risk premium, which reduces the price to consumer.

The multi-purchase doesn’t have to mean multi-decision when you allow the commodity trader to handle the commodity purchases for you. It is sensible to secure the Multi-purchase framework, then discuss requirements with the commodity trader who will action trades and provide recommendations appropriate to your needs and the evolving energy market.

Disadvantages of Multi-purchase:

  • Max duration is 24m.
  • 2 rate instead of 1 where you lose some transparency as the commodity will be weight averaged over the 2 rates.
  • Commodity will be based on the supplier transfer price i.e. their ‘interpretation of the markets’ and likely to include an element of risk.
  • Offers can take the supplier over a month to prepare.

Please get in touch to learn more about Flexible and Multi-purchase contracts and how we can tailor a solution to your needs.

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