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Energy Blog Why Buy A Flexible Energy Contract

Why Buy A Flexible Energy Contract

Kiran Jutti
by Kiran Jutti December 29, 2016
flexible energy basket

A flexible energy contract is a strong enabler for taking advantage of volatility in the energy marketplace, and in so doing, achieving optimal energy costs.

When a commodity is purchased in advance, the supplier will charge a higher price for this.  This price includes what is known as a Risk Premium.  This premium is designed to protect the supplier against any number of risks.

In the case of Natural Gas, for example, this can be anything from the uncertainty of future gas supplies, the uncertainty of future prices and the uncertainty of future cash-flows.  The keyword here is uncertainty, and in buying any commodity on a forward and long term basis the biggest risk is the uncertainty of future events, and the effect this will have on supply.

Research shows that the nearer the market gets closer to delivery or to real time, the less uncertainty there is, and the more certain one becomes of the outcome of events.

However, there are increasing instances where lower price point opportunities can also come well before the need to buy and therefore active and ongoing management of a flexible contract is suggested throughout duration of the framework in place with the energy supplier and not just nearer the time to buy or delivery.

The flexibility to harmonise energy purchasing with your company’s medium to long-term cost planning strategy is far greater and the goal of achieving price optimisation far likely.

This helps eliminates and reduce associated risk.

When buying energy on a fixed price basis, there is a 1:255 of getting this purchase right.

Those odds are dramatically improved by monitoring prices and markets climates on ideally a daily basis and running an assessment to determine possible savings in a falling market and possible budgetary risk in a rising market.

If any action is needed to remain within the limits of the maximum budget level, Catalyst acts to advise in real-time and accordingly. For customers who desire budget certainty, this is still fully achievable in a flexible contract as energy price risk can be capped with parameters specified in the energy risk management policy.

Unbundling energy costs

A flexible contract also allows for a clear understanding of how the energy bill is made up. Nearly 60% of the of the energy bills comprises non-commodity costs which are payable regardless and independent of movements in the wholesale market.

These can be fully fixed, fixed with some elements passed through like RO and FIT and where a long-term framework is in place, rest annually or at the anniversary of the contract meaning that you are paying actual industry out turn prices and reducing risk premiums associated with fixing non-commodity costs long term.