Flexible Energy Procurement: What it is, who it’s for, balancing risk & reward
As an energy broker, you’ve likely had conversations around flexible procurement (particularly following record-high prices during the energy crisis). But what exactly does it mean, and why are more customers asking about it?
If you’re used to working with fixed contracts, the world of “flex” can seem daunting and overwhelming, but it doesn’t have to be. In this article, we’re breaking down what flexible energy procurement is, what it isn’t, and how you can start positioning it to the right customers...
What is flexible energy procurement?
In simple terms, flexible energy procurement allows customers to purchase their energy – both electricity and gas – in multiple parts, or tranches, over time rather than committing to a single rate at contract start.
With flexible procurement, energy buyers are given more control over when they purchase energy, providing an opportunity to leverage market dips and manage their cost more actively.
But, importantly, flexible energy procurement is not about speculating or betting on energy prices. Rather, it’s a structured approach to reducing exposure to high prices and spreading risk.
Fixed versus flexible energy contracts: What’s the difference?
In a fixed contract, the customer locks in their energy price on the day the contract is signed. This option provides predictability and budget certainty – often prerequisites for some customers when agreeing their energy contracts.
However, a fixed contract leaves the customer at the mercy of the market on that specific day. If prices go down the following day/month/quarter, there is no way to capitalise on that.
With flexible procurement, there is, as the name suggests, more flexibility over when the energy is purchased across the duration of the contract based upon wholesale energy market movements.
The pros and cons of flexible energy procurement
As is often the case, there are both pros and cons to flexible procurement – and it’s certainly not going to be the right option for everyone.
Benefits of flexible energy procurement
The main benefit of flexible energy procurement is that it gives customers the option to “buy” (or lock-in the price they pay for their) gas and/or electricity supply throughout the contract term.
This approach offers two major advantages:
- Potential Cost Savings: If the market dips, customers can buy at that lower price
- Risk Management: By purchasing in stages, customers can protect themselves from volatile spikes in the market
The above example shows the price of agreeing a fixed contract (in blue) vs. potential savings to be made by making several purchases under a flexible contract arrangement. Unless you can see the future, it’s incredibly unlikely you’ll select the market lows every single time, but flexible procurement provides the opportunity of 260 (working day) purchasing periods as opposed to just one with fixed.
Potential pitfalls of flexible energy procurement
Flexible procurement isn’t a set-it-and-forget-it approach. With flexibility comes responsibility. It requires more active engagement, either directly from the customer or through the broker.
Here are some considerations to keep in mind:
- Market Risk: Prices can still go up, and without a locked rate, customers are exposed to that risk
- Time Commitment: Customers need to dedicate time (or trust you to) to monitor the market and make timely purchase decisions
- Potential for Complexity: Compared to fixed contracts, the learning curve can be steep, and understanding the nuances of market timing can be challenging
Fixed vs. Flexible Energy Contracts
Flexible energy procurement isn’t for everyone
Flexible energy procurement can be a great fit for customers with larger energy demands and a willingness to engage more actively with their energy strategy.
Flex is therefore ideal for businesses with:
- Large energy needs: Typically, organisations with higher annual consumption, where small market changes can lead to significant savings
- A willingness to take a managed risk: Businesses that understand the market (or have a broker that does) and are prepared for some price movement are generally better suited
- A longer planning outlook: Customers looking for multi-year strategies may benefit from this approach
However, it’s not for everyone.
- SME customers, or those with lower consumptions, may not meet the minimum criteria to qualify for flexible procurement options
- Annual consumption typically must exceed 500,000kwh in order to qualify for entry-level flex products
- Customers valuing budget certainty over all else may not be keen to deploy a flexible procurement approach due to its uncertain nature
So, yes, savings can be made; however, the delivered unit rate will vary throughout the contract in comparison to aptly named “fixed” supply contracts.
Support with selling flexible energy contracts
The trusted partnerships we have with energy suppliers enables us to provide a variety of flexible purchasing products for brokers and their customers.
A few things you need to consider when comparing and selling flexible energy contracts include:
- The cheapest options isn’t always best fit for the customer – customer service levels vary across suppliers, and as with fixed contracts there are variances in terms of the specific supplier offerings
- Non-commodity/Third-Party Costs (which make up a large portion of any energy bill) can range from fully-fixed to fully passed-through depending on the supplier and the type of flex contract
- Trading flexibility – some suppliers will charge additional trading transaction fees which need accounting for on top of the potential commodity cost savings
In any tender negotiation, it is crucial to assess all elements of a supply contract to secure favourable terms that meet customer needs. The goal is to establish a competitive agreement with a supplier that accounts for the businesses’ daily operations while still allowing for strategic trading flexibility.
Due to the nature and suitability of flexible energy procurement, flex contracts are not available for SME contracts (so you won’t see any instant quotes in the energyengine®).
However, for Bespoke tenders, Account Managers are able to provide additional information and support for individual suppliers – so we encourage you to get in touch before sending tenders out if you think “Flex” might be the right approach for your customers.
We’ll be updating this article with further information on the different types of flexible contracts available in due course. In the meantime, if you’re not currently working with us but are interested in learning more, please contact our New Business Team to enquire about joining us.