Minimise risk and maximise savings – the five key factors to consider when tendering for a flexible business energy contract

Flexible energy contracts can deliver significant advantages in comparison to a fixed-price contract but are sometimes perceived as a riskier option as the market price cannot be guaranteed. However, they enable you to spread the risk over the duration of the contract, so, with prudent management, they can deliver significant financial benefits.

But what does prudent management look like? Well, as with all risk management strategies, knowledge is key – making it important to have the right expertise, tools, systems, and processes in place to manage your trades and budget accordingly.

Achieving these goals requires a robust approach and agreed protocols to ensure decisions can be made in an effective, defensible, and timely way. Businesses should ideally have a prescriptive, written risk management strategy, signed off at board level.

With energy prices and decarbonisation high on the boardroom agenda, it is no longer enough for a single energy manager to have full, delegated authority to undertake all trading and set the budget. You need to consider what, when, who and how often you are intending to trade, to execute and deliver an effective procurement strategy. This activity must be supported by written hedging guidelines and established rules of engagement for the execution of trades. Agreeing both minimum and maximum volumes to be traded, that gradually increase with time as the contract delivers will give all your stakeholders comfort that decisions are being made in a prudent, agreed manner.

At Shell Energy, we work in close partnership with our customers to understand their exact energy requirements. With experience across both fixed-price and flexible-price supply contracts, our team is perfectly placed to support your business in both developing its energy buying strategy and creating the appropriate processes to manage risk.

It’s important to be as transparent as possible with your supplier when it comes to consumption trends and forecasting 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? Most importantly, what do you anticipate the impact will be on your consumption over the duration of your contract?

The more accurate your predicted usage, the more you can optimise the benefits of having a flexible contract. You also need to provide your supplier with regular updates on your energy use forecasts to ensure that you get the most out of it.

The key thing to remember is that it’s about increasing the probability of getting a market average price by spreading the risk over a number of trades. As we’ve seen over the past two years, the market has become increasingly volatile – meaning flexible purchasing products, when managed effectively, can allow you to benefit from the recent falling market and similarly would have provided some protection from rising market costs in 2022.

Non-commodity costs, sometimes referred to as NCCs, are a mix of charges that do not relate to the wholesale element of your bill. Examples of non-commodity costs include the Renewables Obligation, Feed-in Tarrif and DUoS. In the past few years, new charges have been introduced and some non-commodity costs have risen. As a result, non-commodity costs now form a significant part of your energy bill. Our pass-through energy contracts allow you to fix your electricity commodity price and choose which non-commodity costs like distribution and transmission charges are passed to you. 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.

It's important to think carefully about pass-through costs and consider what charges are expected to increase during the contract so you can budget for any potential price rises.

It’s likely that choosing the right business energy supplier for your flexible energy contract will depend on a number of critical factors. Considering the market volatility of recent years, the move to secure contracts with stable, long-term suppliers has emerged as an important consideration for many businesses looking to avoid disruption.

Consider the credit ratings of the bidding supplier, will they be here in 2-3 years’ time? How transparent are their offers and do you have confidence that there are no hidden charges or obscure terms? This has become increasingly important as businesses look for ways to de-risk their business energy supply contracts, leading them to select financially strong suppliers that have longevity in the market.

Increasingly, businesses are also searching for ways to decarbonise operations, so are looking for suppliers offering renewable energy contracts, PPAs, or on-site energy solutions such as solar, wind and battery storage that can help to achieve and exceed targets. Alternatively, you may need a supplier that can help you to maximise efficiencies or support you in embracing flexible energy systems through products and approaches such as Demand Side Response.

It's important to find an energy partner that not only offers commodity products, but also one that can work with you and advise on solutions to decarbonise your operations and support your transition to net-zero.

Typically, flexible energy contracts are either two or three years in duration but can be up to 60 months. Unlike a fixed-price 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 in a disciplined, prescriptive and consistent manner to ensure that a defensible, professional procured price is delivered over the duration of the contract.

Energy prices will naturally fluctuate, which means a longer contract will maximise your opportunity to make trades at optimal prices.

The best scenario is to choose a flexible product that provides actual monthly billing rates, giving you the best cost visibility possible and avoids any unexpected residual charges. Look out for summer clips being set too low, and winter clips being set too high, in order to falsely reduce your shape fee. Transparency, especially when it comes to the details, and a trusted partnership with your supplier are key to successfully achieving the full benefits of a flexible business energy contract.

To find out more visit: https://business.shellenergy.co.uk/flexible-purchasing

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