Fixed vs flexible business energy contracts

Fixed and flexible in one paragraph each

A fixed-rate contract fixes the price of unit rates and standing charges for the length of the contract. Ofgem's description is that the cost per kWh stays the same no matter what happens to wholesale market prices. The whole price is set on the day you agree the contract, based on market conditions at that moment.

A flexible contract (Ofgem also uses the name structured contract) does not lock in one price on one day. Ofgem says flexible contracts allow companies to buy energy in smaller portions when market conditions are better, rather than locking into a fixed price, and that they are suitable for large businesses that use a lot of energy. Your eventual price depends on when each portion is bought, so it reflects the market across a period rather than on a single day.

Neither approach is cheaper by definition. They are different ways of handling the same market risk, and the right choice depends on how much energy you use, how much price movement your budget can take and how much attention you want to give to buying energy.

Fixed vs flexible compared

Whichever you choose, the contract is binding once agreed: there is no business energy cooling off period.

When a fixed contract makes sense

A fixed contract suits most microbusinesses and small businesses, and plenty of larger ones. It is the simpler choice when:

• you need a known energy cost for budgeting, pricing or lending
• your energy use is modest, so the cost of managing a buying strategy outweighs any benefit
• you would rather make one decision and not watch the market
• you are on deemed rates or out-of-contract rates and want to move onto an agreed price

The trade-off is timing. The whole price is set on one day, so a fixed contract agreed when wholesale prices are high stays high for the term, and early exit is usually only possible with a termination clause or an exit fee. Ofgem says fixed contracts have a switching window a few months before the end, which is why comparing early matters; see business energy contract renewal.

Also read what is fixed. Ask whether any non-energy charges can be passed through during the term, and compare quotes on the same basis.

When flexible purchasing makes sense

Flexible buying is designed for organisations with enough volume for timing to matter and for a buying strategy to be worth running. It tends to suit:

• multi-site estates and groups with large combined consumption
• energy-intensive sites, often with half-hourly business electricity supplies
• organisations with a defined budget cycle and appetite for some market exposure
• buyers who want to spread purchases rather than rely on a single fixing day

It asks more of you. You need an agreed strategy (how much to buy ahead and when), rules for what happens if prices move sharply, and someone to make purchase decisions. Your final cost will not be known at the start in the way a fixed price is, and a strategy can buy at the wrong moments as well as the right ones.

Where variable-rate contracts fit

Ofgem also describes variable-rate contracts, where the price you pay can go up or down during the contract, for example as wholesale prices change. They are not the same as flexible purchasing: a variable contract follows the supplier's own price changes, while a flexible contract follows a buying strategy agreed for your business.

A variable arrangement can sometimes serve as a short bridge, for example while a multi-site group lines up its contract end dates, and Ofgem's switching guidance says you can switch away from a variable-rate contract at any time. The trade-off is that you have little control over the price while you are on it. Out-of-contract rates and deemed rates are both variable arrangements, and Ofgem says both are usually more expensive than a negotiated fixed-term contract, so a variable supply you have not chosen is usually a reason to compare rather than a strategy.

Flexible procurement through Fidelity Energy

Forever Communications works as an agent of Fidelity Energy, which offers both fixed and flexible procurement. By Fidelity Energy's own description:

• its in-house traders spread purchases across many trades before and during each contract year, rather than buying everything on one day
• upper triggers are used to cap exposure if the market rises, and lower triggers to buy when prices fall
• on some of its flexible products the rate for each 12-month delivery year is confirmed before that year starts, which helps with budgeting
• a flexible strategy can be converted to fixed at any point
• it describes pooled options for supplies from 100,000 kWh a year per utility, and bespoke strategies for larger users (typically 5 million kWh a year and above)

Fidelity Energy is clear that flexible procurement does not guarantee the cheapest rate; it describes it as a more managed way of handling energy price risk. We would not put it any more strongly than that.

Fidelity Energy is normally paid by commission from the supplier, included in your rates, and Forever Communications receives a share; its terms also allow a fee paid by invoice instead. Ask how the service you choose is charged, and read the broker costs in the principal terms. See energy broker fees.

Questions to ask before you choose

1. How much energy do we use, and how predictable is it? Annual consumption and the shape of your usage decide which options are open to you.
2. How much price movement can our budget absorb? If a mid-year rise would cause real problems, budget certainty is worth more to you.
3. Who makes the buying decisions, and on what rules? For flexible buying, ask for the strategy, the triggers and how you are kept informed.
4. When is the price confirmed? Fixed: on agreement. Flexible: ask exactly when and how each year's rate is set.
5. What does it cost to run? Ask how broker commission or fees are charged and check the principal terms.
6. What happens at the end? Ask about renewal, rollover and what default rates apply if nothing is agreed.

Contact us and we can arrange fixed quotes from Fidelity Energy's panel, or an introduction to its flexible procurement team if your volumes suit it.