Flexible Business Energy Contracts: Pros & Cons [Infographic]

08/02/2017 09:45 Energy Market

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Volatility in the energy markets has been at unprecedented levels over recent years. The power and gas supply product offering from suppliers to business customers has increased.

 

The introduction of flexible procurement contracts allows clients to fix, trade or sell energy in order to spread the risk of energy purchasing. The energy component of an energy bill can be traded as a commodity in either short or long term periods.

 

Once the tendering process is complete, in case the user has opted for a fully fixed energy supply contract for the entire contract duration, generally speaking, the job is complete.

 

However, if the choice falls over a flexible energy purchasing option, there are several details and must knows to be considered, with pros and cons on both sides.

 

All organizations will have different budget requirements, and a clear risk strategy within the company must be overseen. Budgets, hedge positions, frequency of purchasing, volumes to be locked and an overall hedging strategy are all very important aspects to be considered in a flexible energy purchasing strategy. 

 

As a consequence, adequate sources of information and tools to make trading decisions and track the market have a key role in this type of procurement approach.

 

(Click infographic to enlarge.)

flexible-business-energy-contracts-infographic

 

PROS


1. Spreading price risk. Enables customers to lock in only some of the costs, or so called ‘positions’ at one time, spreading price risk over a number of purchasing decisions throughout the duration of the contract.
 
2. More freedom. Enables customers to lock in prices at any point during the contract term, partially in tranches or entirely. When the market reflects an attractive price, this can be exploited within the existing contract unlike in a fixed price energy deal, offering more freedom when it comes to purchasing energy.
 
3. Savings opportunities. Having full control over the energy purchasing can bring great savings opportunities if managed correctly. A fixed price energy deal, which requires the locking of the entire contract at a set price, reduces any future savings opportunities, with standard contracts ranging between 1 and 3 years.
 
4. Risk control and income. Having full control over the energy procurement process allows customers to sell the contracted energy back to market if the right opportunity arises. This can be potentially repeated continually like any other trade and can be used to both hedge risk and generate income.
 
5. Transparency. Complete transparency over the component parts that make the final energy bill, allowing customers to clearly separate all the costs, from wholesale market evolution to full view on non-commodity costs such as taxes, distribution and transmission costs.
 

CONS


1. Knowledge. The process often requires a bit more complex purchasing decisions and more knowledge about how the market is going. It has to be managed correctly. Information and the right tools are essential.
 
2. Bigger tradable volumes. Requires significant tradable volumes in order to access the wholesale market. As a result, such products only suit larger businesses, usually with over 10 million kwh annual consumption. On the other side, smaller businesses who have their energy procurement managed by TPIs, can choose to be part of purchase 'baskets.', allowing them to have the benefits of a fully flexible purchasing process.
 
3. Half hourly metering. A flex contract requires half-hourly meter or smart meter to be fitted.
 
4. Risk Appetite. Exposes the customer to some risk, if not properly managed, since markets can be volatile. However, an efficient trading strategy can really be the key to great savings. The customer can always decide to fix the entire contract, thus evolving into a fixed contract.
 


 

Here at EnergyMarketPrice we believe customers should start to use the right tools for managing energy procurement, both fixed or flexible energy purchasing.
 
This doesn’t have to be complicated. With the cloud based trading and reporting solution offered by EnergyMarketPrice for end users, energy consultants and suppliers, reviewing and managing the costs is easier, more efficient and smarter. Full coverage of both wholesale market and non-commodity data.
 

How We Can Help You


1. If you’re an energy broker, please visit our Customer Page Solution page.
2. If you’re an Energy Intensive user, please visit our Hedge Reporting module page.

 

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