For a variety of businesses on the UK, energy is swiftly moving from just an overhead to a real risk factor on your financials. Wholesale prices fluctuate – influenced by global supply factors, market volatility, government policies, and extreme weather events.
Signing a fixed tariff may feel safe, but equally it can put you in a firm position to pay rates that no longer make sense anyway. The real risk today is being rigid. A flexible energy tariff can be a more intelligent choice as it spreads risks and means beneficial price movements in the market can be taken advantage of. It also allows you control of your budget without sacrificing competitive practices in a competitive and unpredictable environment.
To appreciate the value of flexible tariffs, it is important to grasp why energy prices really fluctuate so much.
• Wholesale effect: UK suppliers buy electricity and gas in a wholesale market, and the price in that market can change hourly.
• Geo-Political effect: war, sanctions, and disrupted supply chains might affect gas and oil prices overnight.
• Weather effect: cold winters or hot summers increase demand for energy, resulting in higher prices.
• Government Policy effect: net-zero obligations and subsidies for renewables also change the cost of services.
Let’s consider a large chain of hotels preparing their budget plans in early 2022. Wholesale prices spiked suddenly that year, meaning businesses were locked into much worse fixed deals than previously being available. The take out from this is clear: don’t tie your business into one rate at the wrong time. Businesses require more elastic and nimble approaches to avoid being trapped with the wrong price at the wrong time.
A type of variable energy tariff allows businesses to purchase energy in tranches – smaller portions of consumption – within the contract period. Instead of locking in one fixed price at the start, you purchase energy across the contract period.
Here is how it works:
• With a fixed tariff you are committing to a fixed price for the term of your contact. It is predictable, but what about flexibility?
• A flexible tariff allows you to choose when, and how much, of your future energy you will purchase, based on the market conditions at the time of purchase. This takes on some of the risk and allows you to take advantage of the dips in price.
Many medium-to-large businesses will be adopting flexible contracts from 2025 to give them some balance; some protection against extreme volatility, while having the potential for savings on energy costs.
1. Risk Management
The most significant advantage of flexible tariffs is that by using them, you are able to limit your risk. Instead of rolling the dice on your entire energy budget when buying energy one day at its wholesale price, you can spread that expense over various times during the year. If prices increase, you will have already secured part of your supply at cheaper prices.
2. Budget Control
It’s common to equate flexibility with uncertainty. Most flexible tariffs offer options such as price cap and price floor. This type of flexibility allows you to ensure that the amount you pay does not go above a specified amount, which offers some form of predictability, while also retaining upside potential.
3. Market advantage
Wholesale prices increase, but wholesale prices also decrease. A flexible tariff can help your business take account of those situations. For example, a data centre may feel it can lock in 40% of its anticipated future energy if wholesale price dips significantly allowing long term savings.
4. Transparency and customisation
Flexible tariffs provide greater visibility to each component of your bill. Under fixed retail contracts there isn’t much you can see about the components but with a flexible tariff you see the breakdown of costs and you can tailor your purchasing strategy to fit your consumption profile thus allowing you to better shape your energy buying to meet your operational needs.
5. Sustainability alignment
If your business is pursuing net-zero it’s easier to apply renewable energy certificates or green power options to a flexible tariff. If you were on a fixed tariff you would be limited in your energy choices to comply with one inflexible plan. You can be strategic with your energy mix by adjusting your sources across the flexible tariff options as more opportunities arise to buy cleaner energy.
Flexible tariffs are not appropriate for every organisation, but are particularly suitable for:
• High energy users including manufacturers, data centres and cold storage facilities.
• Businesses with seasonal demand, such as a hotel or retail chains that may fluctuate month to month.
• Growth businesses that want cost predictability but don’t want to commit to longer-term, expensive rates.
If energy use is relatively low, in this case a fixed tariff frankly may be easier. However, for a business where energy is clearly a top three expense, flexibility is often worth the additional management.
It’s critical to be realistic: flexible tariffs aren’t a sure bet to save money. There are risks to understand:
• Market spikes: if prices spike and you haven’t fixed your position sooner, you’ll end up paying more.
• Complexity: flexible tariffs require continued observation of wholesale markets – something most businesses can’t do for themselves.
• Decision timing: poor decision timing for locking purchases can attenuate your benefits.
This is why many businesses utilize the services of an energy consultancy. When you don’t have the expertise, flexibility can simply be exposure. Or, with the right person, it can be protection.
At E for Energy, we focus on providing the best outcomes for businesses accessing flexible tariffs. Our service goes much deeper than simply price comparison:
• Market knowledge: We actively track wholesale fluctuations and provide you with Specialist energy dispatch, advising you on the best opportunities to buy.
• Risk based mix: We create your purchasing strategy, establishing a fixed and flexible purchase mix that’s aligned to your risk profile.
• Leverage power: We will negotiate directly with the suppliers, getting you the lowest possible unit cost.
• Compliance and support: We make sure you don’t overpay for services from VAT and Climate Change Levy (CCL) exemption to improvements in efficiency.
• Active behaviour: Flexibility works but has to be monitored. We actively monitor your flexibility so you and your business is not exposed to risk.
Our approach turns the risk of energy procurement from a financial risk into a competitive edge.
Take a medium-sized hotel group, operating a collection of hotels across the South of England. In 2023, they were hit with an astronomical fixed rate and switched to a flexible tariff with support from E for Energy.
By buying energy quarterly and securing 50% of their demand when wholesale prices were low, the business reduced total costs by 15% compared to previous fixed tariff. Most importantly, it also gave the business budget stability to mitigate any price shocks in any peak holiday period.
This shows that flexible tariffs not only offer savings but also protect profit margins.
Price fluctuations in the UK energy market are here to stay. If anything, they will become more uncertain as the country moves to a greener grid. Businesses adhering to rigid fixed tariffs run the risk of over-paying, or being caught out by rapidly rising energy prices.
Flexible energy tariffs present a more logical route into the energy market and provide risk management, cost control, and the potential to take advantage of falling prices if prices drop. However, they require managed expertise.
At E for Energy, we help UK businesses cut through this complexity to find the lowest cost per unit, and build energy strategies that protect the margins today, and their growth in the future.👉 Get in touch with E for Energy today to see if a flexible tariff could work for your business.