As we have seen, the energy industry continuously experiences changes, from the energy sources we utilise to the focus points of business operations. We are facing volatility levels that we have never seen before with pressure to constantly adapt and develop. A massive impact on the industry is owed to the move from fixed to flexible energy contracts in the selling and procurement of energy.
Traditionally, the markets operated through a fixed system whereby gas and electricity were sold at a fixed price for a fixed period of time. This meant that for one to buy energy, they would have to lock-in a set price for the duration of their contract. This price is based on market price predictions made by the supplier in addition to a price premium to cover the supplier’s risk. By doing so, it guarantees the customer their chosen price point, whether high or low at the time, which means they can have certainty about their cost saving and budget positions. (This of course is based on the assumption that they will consume within their contracted consumption levels.) Nevertheless, fixed price energy contracts became the norm and the most popular way of buying energy due to its stability and certainty assurance.
However, it does come with its limitations for both the customer as well as the supplier. As much as fixed contracts benefit cost saving positions, by procuring at a set price, although it might be low at the time, might mean one misses out on a lower price point in the future with the inability to change the contracted price. On the other hand, for the supplier, by offering fixed price contracts, they as well miss out on an opportunity to expand their offerings and take advantage of the changing energy landscape to grow their business.
The industry has since then been introduced to a better-suited procurement system to keep up with the volatile markets of today, flexible energy contracts. As opposed to the fixed way of purchasing energy, flexible priced contracts operate quite differently. It allows consumers to procure wholesale energy in smaller doses to cater to their required time periods at their required volume and at that given price. Therefore, their energy prices will fluctuate over the course of their contract period. It involves regularly monitoring the prices in the market on a 24/7 basis to ensure procurement of the right prices. These contracts are reserved for large energy users who can choose to purchase in the short term or long term as well as can afford to be less risk averse in the buying process.
By taking advantage of price fluctuations in the market, consumers can, again, improve on their cost saving and budget positions by specifically targeting lower rates. In doing so, the consumer can then also spread the risk associated with this contract type by purchasing their energy at multiple price points. Of course this also means the consumer is susceptible to price increases as well, however, with the help of energy procurement systems which consist of analysis and risk management functionalities that are currently in place, such risk can be mitigated.
Most importantly, flexible contracts provide a hands-on experience for energy customers, both consumers and producers, allowing them to be less passive in the market and more empowered. The changing energy landscape has highlighted the change in consumer behaviour towards energy procurement; there is a movement towards a more customer-centric way of working and operating. More emphasis is being placed on increased autonomy for consumers in the process as well as adapting their offerings towards the consumers’ needs and wants. Consumers now look for energy suppliers that aim to optimise their energy procurement through flexibility whilst still ensuring certainty.
Along with this, there are many benefits of utilising flexible contracts as opposed to fixed that will impact both consumer and supplier greatly.
The changes to the energy transition landscape has meant there is increased competition in the industry with the need for suppliers to be more transparent and informative with regards to not only operations but with pricing. With flexible energy contracts now on the rise, price transparency is imperative for consumers to make decisions on price points and thus make transactions. More and more energy companies are making the move towards displaying live wholesale prices in order to stay competitive. By doing so this not only strengthens the relationship with their customer base but it has a number of beneficial implications for the consumer as well as the energy supplier.
- Cost saving: Customers can make informed decisions based on live price tracking to better aid cost saving measures. With flexible contracts providing the ability to take advantage of price fluctuations, being informed of constant price changes means one can quickly act on a price dip in the market.
- Risk spreading: Unlike a fixed contract, consumers do not need to procure all their energy in bulk all at once at a set price, which may be high. Instead, they have the ability to purchase lower volumes across the length of their contract at multiple price points. This spreads the risk of purchasing at uncompetitive prices and increases the chances of improving their energy purchase prices.
- Strategy alignment: With the opportunity to transact when one wishes due to having a flexible contract, consumers are better able to tailor transactions to their company strategy. They can align their energy procurement to the changes in the wholesale market which would benefit those seeking market lows (Catalyst Digital Energy) and help them target lower volumes at lower prices.
- Transparency: As previously mentioned, by displaying live prices to their customers, suppliers gain the added benefit of being seen as transparent. Large energy consumers specifically target suppliers with visible prices and a visible drive towards optimizing their energy procurement. This added benefit has implications for the company’s brand image, market position and sales revenue. Being seen as transparent improves the brands reputation and can potentially improve their position in the market in the long run, which consequently increases their market competitiveness as well as sales levels.
- Customer retention: Customers Get used to specific supplier interface and online functionality. Now customers have (in)direct access to the wholesale prices, it is the online experience which bonds the customers to the supplier.
For complex solutions such as flexible energy contracts, there is a need to have live 24/7 transmission from live commodity prices to live trade submissions. This opportunity for 24/7 online interaction highlights the rise in informed customer base. Consumers now have high expectations from energy suppliers to have full functioning 24/7 services which are accessible anywhere in the world via web access. Especially in terms of flexible contracts which rely on actions taken by monitoring live prices, the ability to consecutively make transactions is essential.
The following benefits elaborate on why it is important for businesses to offer uninterrupted online access to interact and trade:
- Increased freedom and control: Providing constant access to your products and services increases the control given to customers. Customers can now make transactions when they wish, which can be a vital selling point especially in the energy industry. The move to the more autonomous energy consumer, or prosumer, means customers now expect more freedom in the energy consumption process.
- Improves brand image: As mentioned earlier, there are significant implications of improving the suppliers brand image and strengthening customer loyalty. The constant access to your services demonstrates a positive commitment to your customers. The investment in a 24/7 operating service shows customers you are aware of their need to save costs and be aware of price changes. This will create a positive reputation for the company within the market and contribute to competitiveness.
- Provides geographical flexibility: The possibility of having a geographically mobile customer base is very high, whether it’s for work or personal reasons. This means services need to be accessible to your customers from anywhere in the world at any time that might suit them. Being able to have 24/7 online access would put your company at a better competitive position as it means they do not need to wait to make a trade and most importantly miss out on a price dip.
Flexible energy contracts are specifically designed for large energy consumers but also notably five consumer categories that concern different areas of interests:
- Flexible assets: Customers with flexible assets will find it more cost effective due to the price steering ability. Those with flexible assets can select the cheapest price from an array putting them at the best position in the market.
- Imbalance risk: As previously mentioned, there is some substantial risk involved with taking on a flexible contract; for this reason, large energy consumers are better suited. This is because large companies are able to take on this risk as the imbalance cost will be lower than the potential risk of a markup.
- Procurement strategy: Due to the complexity of flexible contracts, having an energy procurement strategy will ensure optimisation of the procurement process. By having a clear strategy, the company can make both quicker and more cost-effective decisions.
- Green energy: Producers of green energy can take advantage of price developments in the market in regard to renewables. By avoiding long term price agreements e.g., fixed, the cheaper renewable energy gets the cheaper it is for your customers to consume as well as for you to produce.
- Price sensitive: Flexible contracts are also better suited for customers that are price sensitive and wish to determine their own contract price without the imbalance risk associated. For this reason, a flexible contract through an energy management system such as JulesLight can help mitigate this risk while helping you make smarter yet cheaper decisions.