Understanding Flexible Purchasing Supply Contracts

Flexible Purchasing Contracts vs Fixed-Priced Supply Contracts

The simplest way to explain flexible purchasing supply contracts is to look at how they differ from fixed-price contracts.

The main difference is what happens with the wholesale element of an energy bill. If we look at the breakdown of an electricity bill (as of April 23), wholesale electricity makes up 60.16% of the bill.

Having greater control of the wholesale cost of your energy bill is therefore logical as this has the biggest influence on the price you will pay.

With a fixed-price contract, you choose to fix the wholesale element of your supply contract in one go for a period of months. The Graph below shows how wholesale prices have fluctuated over the last three years, ranging from just over £700/MWH to around £40/MWH.

Therefore, the risk of timing the day to fix your wholesale cost over this period has been significant. However, with a flexible purchasing contract, you can spread the fix of your wholesale costs over several transactions; an example is below:

  • 15% fixed 36 months ahead of month of delivery
  • 40% fixed 24 months ahead of month of delivery
  • 70% fixed 12 months ahead of month of delivery
  • Leaving 30% either floating on spot market price or purchased closer to the month of delivery.

Using the graph below as an example, if a flexible purchasing contract had been in place throughout this time, the price paid would have been averaged out over the period instead of getting hit with an increase in price in one go, thus increasing the chance for a lower average price.

What other differences are there?

The other main difference is what your bill will look like. The pie chart below shows that an energy bill comprises many charges. On a flexible purchasing contract, these charges are usually itemised and passed through at the cost charged by the supplier, so instead of having 5-6 cost items on the bill, this can increase to 15-20 cost items. The list below is an example of these charges.

What types of Flexible Purchasing contracts are there?

There are many different types of flexible purchasing contracts; a few are explained briefly below. The availability of different contract types depends on how much energy your business uses annually. The entry-level for Flexible Purchasing is around 1 million kWh per annum.

Entry-level Flex – Designed as a product for customers with little to no flexible purchasing experience. Usually allow one purchase block per month, and non-energy costs are often fixed annually by the supplier.

Standard Flex – Allowing for a greater variety of purchasing strategies, 2-4 purchase opportunities per month is to be expected with this type of product; non-energy costs are usually passed through at cost by the supplier but can be fixed.

Full Flex – The more advanced and complex product type that allows granularity to purchase as many as 10-15 times per month of delivery. Non-energy costs are usually passed through by the supplier at cost but can be fixed.

All the above options are available to customers on a stand-alone basis or as part of a basket of customers where an energy consultant/TPI groups customers together and purchases as a bulk amount.

What happens if I don’t use the energy I purchased?

Cashout

As you purchase energy as a flat amount across the month, your daily usage is unlikely to tie in with this figure exactly, as demonstrated below.

The green bar is the amount of energy that is “cashed out,” which is bought on the spot market where daily usage is higher than the profile or sold back where usage is lower than predicted. Most flexible contracts utilise this principle.

A cashout mechanism can be risky for a customer with large daily or weekly swings in consumption as the spot price could be considerably lower or higher than any energy purchased in advance, exposing you to this price difference month to month.

Baseload

The alternative to a cashout is a baseload-style approach. This type of contract is where you agree to a profile of energy required per month in advance and pay for the average wholesale price you have achieved ahead of the month of delivery. This price could be made up of purchases months ahead and topped up on the spot price average of the month.

The energy supplier takes the price risk on the daily swing in volume; however, they usually include a caveat that if your energy usage changes by more than around 20% per month against expected usage, they will charge you the difference.

Summary

Flexible purchasing contracts can seem quite daunting at first; however, the benefits they can deliver in spreading risk can be considerable, and therefore the cost savings can be substantial versus a fixed-price contract. We recommend seeking advice from an independent energy consultant such as CUB before considering a move to a flexible purchasing contract.

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