Mainly the business energy deals are on a fixed term fixed price basis enabling the customer to lock in a price for a given period.
This brings a level of certainty and predictability to their energy costs however there are some drawbacks not least that the locked-in price means the customer cannot take advantage of any beneficial market movements during the contract period.
The profits of a fixed price business energy contract
- Requires just one purchasing decision in your renewal window
- Provides just fixed unit prices for the entire length of the contract
- Is largely hassle-free, you pick your price and your contract length and can then be sure this will not change allowing improved cash flow management and budget certainty (as long as you keep on top of meter readings)
The drawbacks of a fixed price business energy agreement
- It provides the purchaser with no visibility or controls over-optimizing these prices. Once the deal is entered, that is the energy price you will pay until your agreement ends, no matter how the market moves in the meantime.
- The price will be inflated at the point of the deal – The wholesale market contains built-in premiums for forwarding contracts (1,2,3 years ahead) as traders price in potential future threat from unpredictable events (invasion of Ukraine, Opec warnings, etc)
- Assumes the amount of energy consumed in winter is higher than in the summer as darker nights, and colder temperature increases demand. The fixed rates take account of this trend and automatically skew volume to the higher priced winter periods regardless of how you actually use your energy.
- Assumes there is a significant difference in demand for a working weekday and for a weekend, whilst weekdays are broadly similar, the weekend volume is significantly lower. Again the fixed rates will twist volume to the higher-priced peak weekday period regardless of when you actually use your energy.
- It is based on a typical business consumption profile that assumes demand is at its highest in the middle of the day. The profile is the ‘anticipated’ form a typical customer’s demand trend would look like. As well as winter and weekday premiums, rates are also higher in the daytime and actually peak at lighting uptime. As the anticipated peak of business consumption corresponds with this peak period, the fixed price is again skewed to the higher-priced periods
- Not all elements of the price will necessarily be fixed for the entire contract period, to understand this more visit our guide to Are fixed deals really fixed?
In conclusion, fixed rates are a great way to access the business energy market with a level of certainty. They are the most popular product for a reason – they work. But in order to give this level of certainty to the customer, the energy supplier needs to forecast against generic assumptions and add a ‘risk’ price into the equation.
The result is often a premium to the sum of the constituent parts.
The alternative method, a Flexible Price, is a more involved purchasing decision and isn’t right for everybody.
It is of course necessary however to negotiate the price down to a competitive level, as you would expect with any commodity. In addition, another key element is keeping control of your meter readings, and ideally fitting a smart meter to accurate as possible billing and cash flows for your business.
If a fixed energy deal interests you, we’d love to hear from you, simply give us a call on 08000488472 and we’ll get to work on your behalf straight away.