Imagine knowing exactly when to lock in a price and when to stay agile. That is the crossroads between fixed and flexible energy contracts.
In reality, there are only two types of energy contract: fixed and flexible. The question is not which is better in theory, but which is right for your business, at the right time.
Fixed Procurement
Fixed procurement is designed to offer a fixed price for a fixed term energy rate. Done well, it provides absolute budget certainty for the contract length you decide, typically anywhere between one and five years.
For smaller energy users in particular, this often makes sense. Energy tends to make up a lower proportion of overall business spend and is therefore best controlled using a budget-oriented approach. A fully fixed, fixed-term contract, where both commodity and non-commodity charges are fixed ensures there are no surprises.
However, as the contract length increases, so too does the risk premium that a supplier builds into the agreement. The longer the guarantee, the more they charge for carrying that risk. There is no guarantee that the longest contract delivers the best value, only that it delivers the greatest certainty.
And here is where many buyers get caught out.
Not all fixed contracts are truly fixed.
Some are partially fixed, where suppliers retain the ability to pass through changes in non-commodity costs or introduce new charges driven by government levies or regulatory changes.
Even more prevalent, particularly on longer-term agreements, are pass-through energy contracts. These fix the commodity rate but pass through non-commodity and tax charges at prevailing rates. They can look exceptionally cheap at the outset, and are sometimes presented as outstanding deals. In reality, they can turn out to be significantly more expensive over time.
There is another misconception around fixed contracts, that value comes from signing a long-term agreement and having multiple brokers price the contract on the same day to drive competition.
The truth is simpler.
On any given day, the market price is the market price. If all brokers go to the same suppliers asking for the same contract structure, fully fixed or fully pass-through, those underlying rates should be broadly the same. The only real difference is often the commission added.
Historically, the value in fixed contracts has come from timing to market and selecting the appropriate contract length for prevailing conditions.
There are periods when buying further ahead is cheaper than buying short term, making longer contracts good value. There are also times when long-term pricing is more expensive and a shorter contract delivers better value while you wait for fundamentals to shift.
At True Group, we propose agreeing a working framework, for example three years, and then, within that period, choosing the fixed contract lengths that suit your business at the time you wish to sign them.
Fixed, then, is not about signing the longest deal possible. It is about certainty, control and timing.
Flexible Procurement
Unlike fixed contracts, flexible contracts have a variable commodity cost. Your energy price is much more directly linked to wholesale markets.
Those wholesale markets are broken down into years, seasons, quarters, months and even day-ahead products, often referred to as the prompt. Typically, energy becomes cheaper the closer you get to the day of delivery because there is less risk premium built into the contract. Market fundamentals are more likely to be known.
However, short-term markets can also become more volatile because they are more likely to be impacted by short-term fundamental changes, such as weather forecasts or geopolitical events.
Understanding these dynamics is key to managing risk on a flexible contract.
Using traders and risk managers, such as those at True Group, you decide how and when to buy volumes of your energy across the life of the agreement, typically three years in length.
For example, you may choose to buy 50% of winter volumes early but only 10% of summer volumes because summer energy is typically cheaper than winter energy. In different market conditions, you may do the reverse.
It is this flexibility and control over your energy spend that makes flexible contracts so compelling. Rather than asking the supplier to carry all of the risk and charging you a premium for that privilege, you assume some of that risk yourself, managed properly.
Individual Flexible vs Fund Contracts
Flexible contracts fall into two broad categories: individual flexible contracts and group flexible contracts, often called funds, baskets or portfolios.
An individual flexible contract is typically best employed by larger energy users, usually from around 10 gigawatt hours (GWh) of annual consumption, although it can work at lower levels in the right circumstances. At this scale, you have greater ability to transact across the markets available and implement dynamic strategies specific to your business.
For those between roughly 2 and 15 GWh of consumption, a fund contract may be more appropriate.
A fund aggregates multiple smaller energy users into a single flexible portfolio. It operates in exactly the same way as an individual flexible contract, accessing wholesale markets and trading volumes nearer to delivery. The principal trade-off is that within a fund, the strategy is governed by True Group rather than by a bespoke risk management policy defined by the client.
You gain the benefits of flexibility and professional trading, without the need for day-to-day involvement in managing positions or reviewing risk policy.
A Common Misconception About Flexible Contracts
One of the biggest misconceptions about flexible contracts is that they guarantee a better price.
They do not.
Flexible contracts offer control - a very important word in procurement.
A flexible contract is not about beating the market every single time. It is about taking control of your energy spend.
Over the long term and in favourable markets, a flexible contract should outperform a fixed contract over the same period. This is because you reduce the amount of risk premium you give to the supplier. By managing that risk premium yourself through structured trading, you should deliver a better outcome than a comparable fixed contract.
But there are no guarantees.
It is also not true that flexible contracts must be more complicated.
Complexity exists if you want it. Larger energy users often embrace more sophisticated strategies because they are big enough and complex enough to make that sophistication work in their favour.
However, joining a fund is no more complex than joining a fixed contract. You join, you set the contract length, and True Group does the hard work. We provide updates through reports and through the True platform, showing how you are performing against market conditions.
Simple, right?
So, Which Is Right for You?
The real questions are:
How important is absolute budget certainty?
How comfortable are you engaging with market risk in pursuit of long-term value?
Ready for an Honest Conversation?
If you would like an unbiased, honest reflection on how your current strategy is performing, or simply want to talk through the burning questions or concerns you have, come and speak to True Group.
Let’s have a real conversation about your procurement approach and give you clarity and confidence in your next decision.