What type of energy contract should I have?
Energy is a necessity, and everyone must have it to operate their business. It can be a big chunk of a business’s spend normally ranking within the top 3 expenses and needs to be reviewed effectively to ensure the business is not only on a competitive rate but also the right type of contract.
There are many types of businesses, consumptions, meters etc. across the industry which can contribute to how a decision is made and what contract is best. There are many factors to take into account like budgets, requirements, systems, and even political unrest i.e. Brexit for when a contract is agreed.
It is difficult to know what type of contract to go with due to the uncertainty of the market, however, if you can make informed decisions that are right for your business it helps to make the procurement process a lot easier.
The contract types are below and how they tend to work;
This is the most common and suits all business types looking for security and will have their prices fixed throughout the duration of their contract regardless of how long the contract length. The suppliers build in an element of risk into the overall unit rates to ensure the rates are viable and sustainable.
This type of contract will protect you against any mid-contract price increases and provide full budget certainty for the duration of your contract. This does not necessarily mean your monthly payments will be fixed as this is determined by the kilowatts used.
This works in a similar way to the fully fixed option however, the prices can be changed at any point if a certain threshold is met or there are extreme bullish movements within the wholesale markets. The thresholds/ terms will be set by a supplier as to when the prices change and any increased is passed on to you. It is always recommended to get a firm understanding of exactly what has been set which can include any number of the third party charges and varies from supplier to supplier.
Pass through contracts differ from the fully fixed/fixed options as it is only the duration and the wholesale commodity cost of the energy that is fixed with the remainder of the price (third party costs) being passed through to the end user at cost rather than the fully fixed contract as these charges are higher as there is a risk factor built in to them. With the pass-through contracts, the third-party charges as variable and can change at any time so there is only a commodity cost budget certainty for the business.
The passed through / third party are listed below and can vary from supplier to supplier;
- AAHEDC – Assistance for areas with High Electricity Distribution Costs
- BSUoS – Balancing Use of System charges
- CM – Capacity Market
- CfD FIT – Contracts for Difference Feed-In Tariff
- DUoS – Distribution Use of System Capacity
- DUoS – Distribution Use of System Excess Capacity
- DUoS – Distribution Use of Systems Fixed
- DUoS – Distribution Use of System Reactive Power
- DUoS – Distribution Use of System Unit
- FIT – Feed InTariff
- Meter Rental
- Metering & Meter Reading
- RO – Renewables Obligation
- TNUoS – Transmission Network Use of System
Flexible contracts have become a more popular tool to manage risk in electricity purchasing.
Compared to a fixed contract which has the cost essentials locked in for the contract, including the commodity cost, a flexi contract doesn’t have the energy part included when the contract is signed.
Non-Commodity Costs can be Fixed or Pass-Through in a Flexible energy contract, but the energy pricing is done throughout the duration of the contract – you will always be supplied energy and you have the ability to set the price of your energy through trading. You can buy at times the market is looking favorable according to your knowledge/expertise.
This is typically for businesses on a very large scale who usually have a dedicated employee/department overlooking the whole operation.
There are many factors before agreeing on a flexi contract, the main ones you’ll need to decide are;
- Portfolio management – you can add and remove meters.
- Energy purchasing – Exactly how you are going to buy the energy
- Non-energy costs – Fixed or Variable?
There are also deemed contracts/variable contracts or ultimately no contract in place at all which means typically you’ll be paying above market average prices for your energy and need to be looking to agree one of the above which will depend on your business type and energy purchasing strategy and adversity to risk.
Within each contract type, each supplier offers multiple variations and options, so it is important to have a strong knowledge of each suppliers’ products as you are unable to make an apple for apple decision without this.
Whatever the contract, our experts can help you – just call 0115 896 5460.