With Brexit looming and volatility in the energy market set to continue, those whose procurement contracts are ending shortly may be wondering what the best approach for their business: to fix, or to flex?
The UK’s energy market has been turbulent for some time now, with the ongoing negotiations and ever-changing deadlines around Brexit inevitably affecting businesses’ energy prices. While we’re currently preparing for a 31st October deadline, whether we leave with or without a deal is yet to be decided, which brings a significant amount of uncertainty to the market.
If we leave with a deal, we’re likely to remain part of the EU Emissions Trading Scheme (EU ETS) for example, whereas if we leave with no deal the UK will need to replace this scheme with another that sets a fixed price for carbon. As carbon is one of the key drivers of our gas and power prices, whether or not we remain in the EU ETS after Brexit is crucial.
What’s the market outlook?
It’s not just Brexit that will affect the market – there are such a wide range of external factors that influence the market, adding complexity to predicting whether prices will rise or fall in the future. Several factors could push prices up – as the UK’s nuclear fleets continues to age, and we become more reliant on intermittent renewable generation for example, a risk premium could be added as a result of supply security anxiety. What’s more, future investment in new nuclear may be passed on to customers with the Government currently reviewing funding strategies for new builds.
Other factors could cause wholesale prices to fall. Liquified Natural Gas (LNG) is becoming more important in the UK, for example, and the global supply of LNG is increasing. Downward pressure on wholesale energy prices could be further compounded on growing Continental supply, particularly as the RUS-GER Nord Stream 2 pipeline nears completion in early 2020.
When it comes to non-commodity costs, however, a significant increase in coming years is fairly certain, as our energy system continues to evolve and maintain the balance between supply and demand becomes more complex.
Should my business fix or flex?
The potential for wholesale prices to rise causes many risk-averse businesses to opt for a fixed price contract, but it’s important to recognise that there is a level of risk involved regardless of whether you fix or flex. Many see flexible contracts as inherently riskier than fixed products due to the multiple purchasing decisions involved, but this risk can be mitigated by making well-informed decisions about when you buy your energy and how much you buy.
Fixed products also aren’t without risk – in fact, there’s a risk premium built into fixed contracts, so you’re always paying more than cost for your energy. They are also never truly fixed, as if your supplier faces new charges, then they will be passed through to your energy bills. So, while your appetite for risk should be a key consideration when choosing a procurement strategy, remember that ‘fixed’ doesn’t mean ‘risk-free’.
You should also assess whether you will need external support with procurement. If you don’t have the support of external experts, such as Inspired’s procurement team, you may find it difficult to access the full benefits of a particular product. The biggest benefit of a fixed contract, for example, is buying and locking in when prices are low, but you may need expert support to gauge when a market low is present. One of the biggest benefits of a flexible contract, on the other hand, is being able to buy your energy when prices fall – but once again, gauging when is best to buy often requires support from experts who have well-rounded insight into the market.
You may also need help with more than just your procurement. While fixed contracts come with relatively simple bills, their simplicity can also lead to a lack of transparency around both commodity and non-commodity costs. If you choose a flexible contract, you gain total transparency around your costs, but your bills will also be more complex. This makes billing errors more likely, so if you have a flexible contract is wise to have support with billing validation to ensure you’re not being billed incorrectly.
Is there another way?
If the benefits of both fixed and flexible contracts sound appealing to you, you don’t have to choose one or the other. Taking a portfolio approach to energy buying can give you the ‘best of both worlds’, as you spread your volume across multiple buying strategies – fixed and flexible. This enables you to benefit from a procurement strategy that’s tailored to your organisation’s unique needs.
Portfolio strategies do require external support, however, and Inspired’s procurement experts are best placed to help you build your ideal portfolio. We can help you to take an entirely bespoke approach, or a more collaborative approach, aggregating your volume with similar businesses to enable you to reduce the risk of breaching your volume tolerance thresholds.
Our team will use best practice and our extensive experience to make well-informed purchasing decisions. We’ll also provide you with a forecast fully delivered cost per month, giving you transparency and peace of mind around your energy costs. To find out more about how we can support you with a fixed, flexible or portfolio approach, visit our Procurement page.