Flexible energy contracts
By removing the complexity up front, Flexible energy products enable higher consuming businesses to purchase electricity or gas transparently in the wholesale market.
Flexible contracts provide access to favourable market prices that are unavailable through traditional fixed price contracts, reduce the risk premiums that are levied by suppliers and allow businesses to spread purchasing decisions to meet budgetary requirements.
Adalta Energy specialise in Flexible energy contracts and would always recommend that higher consuming businesses consider the product as a way to optimise energy costs.
Flexible pricing
Whilst the underlying pricing methodologies for both Fixed and Flexible products are comparable, individual cost components, risk premiums and management fees are made transparent through a Flexible contract so that the commodity element itself can be separated and purchased with greater flexibility.
Rather than making a single purchasing decision, Flexible contracts enable larger energy consumers to monitor commodity markets and develop hedging strategies to meet their requirements.
Flexible products provide consumers with a framework to purchase energy across a longer time horizon and react quickly to market conditions. At point of contract signature, there is no requirement to purchase any energy, rather you have an option to purchase up until physical delivery.
Furthermore, due to the nature of the product it follows that some costs, such as collateral, credit risk premia and management fees, will always be lower through a Flexible contract.
Commodity purchases
For both Fixed and Flex products a supplier will trade your commodity as a futures product on the UK wholesale market.
Through a Flexible contract it is possible to transparently purchase power and gas, via the chosen supplier, according to market liquidity at that given time.
Typically, the front three months, front two quarters and front five seasons are liquid.
Alternatively, businesses can choose to place a proportion of their consumption onto an index to track prices closer to delivery. There are a number of different indices but these are commonly grouped as Day-Ahead or Settlement indexes (sometimes referred to as Spot Prices).
Hedge strategies
Hedging strategies vary according to individual risk appetite and are developed as part of the onboarding process with Adalta Energy.
The following underlying assumptions provide context to development;
- Future seasons have an element of risk premium built into the market price due to the ‘unknown’ (typical forward market ‘in contango’). They do, however, provide long-term budget certainty
- Prompt month can be most volatile due to short term speculation around supply and demand (e.g. generation capacity, weather, etc.). It follows then that prompt prices can be discounted to seasons
- Day-Ahead is likely to outperform monthly, quarterly and seasonal prices, if there are no bullish short term drivers. This carries the most amount of risk and budget uncertainty.
In the example hedge strategies, a rolling approach is used to spread purchasing of liquid periods over an established timeframe using prescribed parameters. This enables businesses to capitalise on market opportunities whilst also reducing exposure to extremes.
Managing shape
In the UK, electricity consumption is forecast and settled for each half hour during the day. Gas is settled at a daily level. Irrespective of whether you have a fixed or flexible contract, it is not possible to openly trade an exact forecast of your consumption requirements directly in the forward market.
Rather, energy suppliers purchase flat ’Baseload’ blocks measured in Megawatts (MW) for electricity and therms/day for gas. The supplier must then buy and sell more granular 'shape' positions closer to delivery.
For a traditional Fixed price contract, the supplier bundles the forecast shape cost with the baseload cost (alongside many others) and presents a single opaque rate which is agreed at contract signature.
Under a Flexible purchasing arrangement, the cost of shape is addressed through either a 'Shape' premium, agreed ahead of delivery, or through a 'Cash Out' mechanism, which passes through the actual costs of settling positions once known.
There are advantages to both mechanisms and the merits of each should be discussed before agreeing which product best meets the needs of your business.
Budgeting, monitoring the market and managing risk
Budgets can be managed using the prevailing forward curve and established tolerances; depending on your risk appetite.
Throughout your Flexible contract, Adalta Energy will monitor the market on behalf of your business and provide regular market/budget updates through ongoing reviews.
Outside of the routine cycle, we will also notify you if and when pre-agreed limit conditions (wholesale prices) are met.
The introduction of higher 'caps' and lower 'collars' provides greater certainty in minimising losses and realising opportunities.
By setting agreed tolerances, clients can guarantee their customer pricing whilst maintaining flexibility to beat their underlying energy cost levels.
Flexible baskets
Baskets represent a great way to manage risk for businesses who, on their own, aren’t large enough to access the benefits that flexible energy contracts offer.
By pooling volume together, smaller businesses can access similar hedging strategies to those employed by the largest consumers. In that way, multiple purchases can be spread over a long period of time to ensure a more predictable cost base.
By joining our Verdant Power Portfolio, Adalta Energy offers an alternative to taking a fixed price contract and an opportunity to navigate a way through the current energy market crisis.
It’s also 100% backed by naturally sourced renewable electricity so your business can deliver on its Net Zero goals too.