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Fixed vs Flexible Contracts: Which Is Right for You?
When choosing an energy contract, one of the big decisions is whether to lock in a fixed price or to go with a more flexible pricing approach. Each strategy has its pros and cons. The best choice depends on your business’s appetite for risk, your budget stability needs, and even your energy consumption profile. Let’s break down what these terms mean and how to decide:
Fixed Price Contracts: This is the traditional route most small and medium businesses take. You sign a contract (often 1–3 years) where you pay a set unit rate for energy, regardless of what happens in the market. The obvious benefit is price certainty – you know exactly what rate you’ll pay, which makes budgeting simple. If market prices skyrocket, you’re protected at your fixed rate. The downside is if market prices fall significantly, you don’t benefit; you’re locked in at the higher rate until the contract ends. Fixed contracts often include all or most extra charges in the rate, so they’re straightforward (just the daily standing charge plus your fixed unit rate). Keep in mind, suppliers do charge a bit of a premium for taking on the risk – your fixed rate will include some “insurance” against future increases. But many businesses gladly pay a small premium for stability. Fixed contracts are usually best if you value budget certainty or if you suspect prices will rise in the near future.
Flexible Pricing Contracts: “Flexible” or “flex” contracts come in a few forms, but generally they mean you are not fully locking in the price upfront. One common type is a flexible purchasing contract used by larger energy users: instead of fixing, the business (often with a broker’s or consultant’s help) buys tranches of energy throughout the year. For example, you might lock 30% of your volume for next quarter, then later lock another 30%, and so on, or even buy some on the day-ahead market. This can let you average out costs and take advantage of dips in the market. Another form of flexibility is simply a variable tariff – where the rate you pay changes with the market (sometimes monthly or quarterly). The obvious benefit of flex approaches is the potential to pay less if market prices fall. You’re not committing everything at a possibly high moment. However, the risks are significant: if prices keep rising, a flexible contract will end up costing you more than if you had fixed earlier. During the 2021–22 energy crisis, some businesses on flexible arrangements delayed buying in hopes prices would drop, only to see them hit record highs – they ended up paying far more. Flexible contracts also require active management: you (or your broker) must monitor the market regularly and make purchasing decisions. They’re more common for larger users who have the bandwidth and expertise to do this.
Hybrid Approaches: There are middle-ground options too. For instance, some suppliers offer “tracker” contracts for smaller businesses, where your rate might follow an index (so it moves monthly with wholesale prices, sometimes with a cap and floor). Another approach is a capped contract: you’re on a variable rate but it won’t exceed a certain ceiling. These hybrids try to give a bit of the best of both – some protection, some ability to benefit from falls – but availability is limited and they can be complicated. If you’re considering something like this, be sure you fully understand the terms (or consult an expert) because they can have conditions that affect the outcome.
Which Should You Choose? For most small and mid-sized businesses, a fixed contract is the safer bet. Energy markets are notoriously hard to predict (as we discuss here), and few SMEs have the resources to play the market proactively. Price certainty often outweighs the gamble of trying to beat the market. However, if you have a larger consumption and are willing to actively manage it (or hire someone who will), a flexible strategy could save money in the right conditions. It essentially comes down to risk tolerance: fixed = insurance and simplicity; flexible = opportunity and risk. It’s also not an all-or-nothing choice – you might fix your electricity for 2 years (for stability) but let your gas be on a pass-through or shorter deal if you expect gas prices to fall, for example.
Key Considerations: If you do go flexible or variable, have a plan. Set target prices at which you’ll lock in chunks. Keep an eye on market indicators (gas storage levels, geopolitical news, etc.). Make sure upper management is aware of the budget uncertainty. Conversely, if you go fixed, don’t fix and forget until the last day – monitor the market as your end date approaches; sometimes it makes sense to secure your next fixed deal early if rates dip. Remember, you can also stagger contracts – e.g., fix half of your volume for longer and half for shorter, to avoid all your energy coming off contract at the same time (a strategy some larger firms use to hedge).
Still unsure? You’re not alone – this is one of the trickiest decisions. We routinely help clients weigh these options. Feel free to consult with us about your specific situation. We can analyze your usage and risk profile and recommend a strategy. And whichever route you choose, we’ll work to execute it in your best interest – whether that’s diligently monitoring the market for flex purchasing opportunities or locking in a competitive fixed rate at the right moment. You can also read our piece on managing energy price volatility for related tips. Ultimately, the goal is to secure energy at a cost that your business can live with, without unwelcome surprises.