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Five things to consider when tendering for a flexible energy contract

18 January 2022 | 5 minutes

Flexible energy purchasing can be a compelling solution for major energy users.

But with varied and complex options available, it’s important to understand what key features your business requires from a flexible energy supply contract.

Flexible energy supply; the basics

An alternative to fixed-price energy contracts, flexible purchasing energy contracts provide major energy users with an opportunity to take advantage of wholesale energy market movements.

Flexible energy products and qualifying criteria vary from supplier to supplier. Traditionally, utilised by many industrial and commercial users, it’s now a real option for many mid-market business consumers too.

While your energy supplier will work in partnership with you to optimise your flexible purchasing contract, it’s important to understand the details of your contract to minimise risk and maximise savings. We’ve set out five key factors that should be taken into consideration when tendering for a flexible energy contract.

1. Contract duration

Unlike a fixed contract, which sees a set price agreed for the unit rate and standing charge at the outset, a flexible purchasing contract enables businesses to capitalise on the ever-changing energy market. The aim is to buy energy during price dips to realise savings over the duration of the contract.

Energy prices will naturally fluctuate, which means a longer contract will maximise your opportunity to make trades and utilise sell-backs to improve the commodity cost you are paying. Typically, flexible energy contracts are two or three years in duration.

2. Predicted usage

It’s important to consider consumption trends and forecast energy usage for the future. For example, are you planning to expand or streamline operations? Do you have plans for on-site energy efficiency or generation? Importantly, will this impact your consumption over the duration of your contract?

The more accurate your predicted usage, the more beneficial your contract will be. If you do opt for a flexible energy contract you should look to update your supplier regularly on your forecasted usage.

3. Non-commodity, pass-through and what to fix

Pass-through costs, like green taxes, can complicate the flexible energy contract tendering process. Under fixed contracts, suppliers will offer fully fixed non-commodity costs.

Flexible energy contract non-commodity costs are generally offered on a pass-through basis. However, the finer details can be negotiated with your supplier. Energy only or pass-through contracts are also available where you’re able to fix your commodity costs but pass-through the non-commodity elements.

If you do decide to pass-through non-commodity costs you should consider what charges are planned to increase during the contract so you can budget for any potential price rises.

4. Which supplier to choose?

It’s likely that choosing the right energy supplier for your flexible energy contract will depend on a number of critical factors. For example, if you're keen to decarbonise operations, suppliers offering renewable energy or on-site energy solutions such as solar, wind and battery storage can help you to achieve and exceed your targets.

Alternatively, you may need a supplier that can help you to maximise efficiencies or support you in embracing flexible energy systems – through elements like Demand Side Response (DSR).

Finding the perfect partner for your individual requirements is therefore hugely important.

5. The key risk management strategy

Flexible energy contracting can deliver significant advantages, but it’s essential to understand how best to leverage them. Managing a flexible energy contract is often viewed as a riskier option compared to a fixed contract. As a result, it’s important to have the right expertise, tools, systems and strategies to manage your trades and budget. If you get it right, it’s possible to save money, decarbonise supply and futureproof against risk.

Shell Energy is the perfect partner for your energy requirements. With experience across both fixed and flexible supply contracts our team is well placed to support your business with its energy buying strategy.

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