Deciding whether to opt for fixed or varied energy prices is crucial for retail energy buyers. It involves choosing between a fixed level that stays constant for a specified period or a rate that fluctuates based on market factors. The first step in this process is understanding your company’s risk tolerance. Do you prefer the minimal risk offered by a fixed cost structure for better certainty and budgeting, or are you willing to speculate on energy pricing in the market by signing a long-term contract, taking a chance?
The challenge arises when it is time to sign a first-time contract or renegotiate an existing one. While an energy supply contract can be profitable, it also demands time and resources to analyze the market and forecast future price trends. If energy makes up a sizable part of your budget, it is worth investing time and resources into developing a purchasing strategy that predicts and accounts for price movements. Seeking assistance from a reputable external consultant may be necessary in this regard.
Many executives in small-to-mid-sized businesses prefer fixed-rate electricity supply contracts. Knowing the certainty of your energy prices provides realistic guidance on your company’s energy expenditure throughout the year. It also ensures that you can meet your annual budget while reducing overall risk.
On the other hand, large-scale energy users often have valuable insights that aid them in predicting future energy prices and developing long-term purchasing strategies. They can monitor local energy prices to assess if they are likely to rise and secure a fixed-rate contract to safeguard against future price increases. If they expect a decline in prices, they may opt for a variable-rate contract with a retail supplier, allowing their rates to decrease in line with the energy market.
Numerous factors can influence prices over the course of a contract. These factors include fuel pricing, transmission constraints, pricing of alternative energy sources, environmental regulations, aging infrastructure, and other relevant considerations. All these factors must be considered when deciding.
Here are a few factors to consider when choosing between fixed or variable rates:
1. Price Premium:
Fixed-rate contracts often come with a higher price compared to market rates, as suppliers need to recover costs associated with long-term contracts. Longer-term contracts typically demand higher rates due to increased risk for the suppliers.
2. Contract Length:
It is crucial to consider how long the contract will last before renegotiation. To secure pricing for a long time, lock it in if you anticipate market rates increasing in the next few years.
3. Terms and Conditions:
Familiarize yourself with the contract terms, ensuring there are no hidden fees, renewal terms, or early cancellation penalties.
Energy managers can save by timing natural gas purchases effectively with a procurement strategy despite stable prices.
Contact Renodis for consulting on the best natural gas procurement options at info@renodis.com
