What Are The Types Of Energy Contracts?

Variable rate

Variable rate is linked to market conditions. So, your unit rate and standing charges can increase or decrease throughout the duration of your contract.

It means if wholesale marketplace gas and electricity prices increase, you’ll end up paying more for your supply.

Marketplace volatility can make it difficult to forecast how much your bill is going to be. However, you can benefit when wholesale prices fall.

+ Opportunities to save money when wholesale prices fall.
– Exposed to increases when wholesale prices increase.
– Difficult to forecast how the wholesale market will change over time.
– Can make budgeting on a month-to-month basis a challenge.

Fixed rate

With a fixed rate deal, you’ll agree on and pay a set price per kWh (kilowatt hour) for the duration of your contract.

Of course, your overall bill will depend on how much gas or electricity your business uses. But the unit price and standing charge will not change.

+ Protected against wholesale marketplace price rises.
+ Makes budget planning more straightforward.
– Miss out on potential savings when wholesale marketplace prices fall.
– Automatic rollover at end of contract may result in a more expensive plan.

Deemed rate

Deemed contracts are introduced when you take on a new premises and use gas or electricity before agreeing a new deal.

You’ll find yourself paying a supplier’s most expensive rates. This is because suppliers forward buy and you’re free to switch suppliers with relatively short notice.

You can avoid this by arranging a new contract in advance of moving into your new premises. If this isn’t possible, be sure to resolve the issue as soon after your relocation or new opening as possible.

+ You can switch to another supplier without facing a penalty.
– Very expensive compared to fixed rates.

Out-of-contract

You’ll be placed on an out-of-contract rate if you let your previous contract expire without renewing or switching.

They’re higher than regular rates because suppliers buy energy in advance, and a customer out of contract is free to switch at any time. So, there’s a lack of certainty on how much they need to buy to fulfil the supply.

It’s not the same as a deemed contract – and you’ll only find yourself in this situation if you’ve decided not to sign a new deal.

If your supplier contacts you and you refuse their offer while you’re out of contract, you’ll still be liable for these rates. The best way to avoid them is to make sure you monitor your renewal date.

+ You can switch to another supplier without facing a penalty.
– Very expensive compared to fixed rates.

Rolling contract

You might also hear rolling contracts referred to as ‘evergreen.’ When you contract with your supplier ends, your plan will simply roll over.

They’re not as competitive as the rates you might previously have been getting. However, you may have the option to renew for longer at a lower rate.

Rolling contracts are not as common as they once were. And it’s always worth monitoring the terms so you don’t unexpectedly end up paying a higher rate.

+ Stay with the same supplier; no need to organise a switch.
– Could find yourself paying a slightly higher rate when your plan rolls over.

Pass-through contract

Pass-through contracts are less common. You can fix the cost of your gas or electricity but pay the true non-commodity costs.

These non-commodity costs include any charges relating to distribution and transmission of your supply. They’re reviewed regularly, with any savings passed on to you and your business.

Suppliers typically only offer these contracts to medium and large business customers with half hourly meters installed.

+ Opportunity to fix your gas or electricity unit cost.
+ Regular review of non-commodity costs mean you could save money.
– However, if non-commodity costs rise, you’ll be exposed to the increases.
– Usually only available to large businesses.

Flexible contract

Under a flexible energy procurement approach, you can purchase your energy in tranches or blocks throughout the duration of your contract,

It means you can make purchasing decisions based on real-time wholesale marketplace data and trends, which can protect you against volatility.

However, the market intelligence and frequent analysis required to make the most of this means it tends to work better for large organisations.

+ Opportunity to buy energy you need proactively.
+ Can offer protection against marketplace volatility.
– Requires dedicated market intelligence and analysis.

Prices at wholesale can fluctuate significantly depending on market conditions. Some of the primary causes include:

• Demand Increase – during winter, for example, the demand for gas and electricity will depend on how mild or cold the temperatures are. When demand is high, prices rise.
• Supply Disruption – strikes, infrastructure damage and maintenance, as well as conflicts, political uncertainty and natural disasters can all impact supplies, reducing output, which increases prices.
• Currency – currency can influence the cost of gas and electricity at wholesale. Given that the UK imports a significant amount of its energy (37% in 2022), the power of the pound is significant.

Both contract types have their advantages and disadvantages – some more or less applicable to businesses of certain sizes, or in specific industries.

Fixed rate contracts offer greater security against marketplace volatility – you know exactly what your unit rate is, and you can budget accordingly.

Variable rate contracts enable you to potentially make big savings when wholesale energy prices fall.

It’s a decision that requires a lot of planning and thought. Want to get a better idea of which is best in the current market conditions? Read our guide on whether you should fix your energy prices until 2025.

When your business energy contract is due to end, it’s important to assess all your options. Making a comparison will make these options much clearer.

Here, at Utility Bidder, we specialise in helping businesses like yours save money on their energy supply.

Our energy brokers specialise in negotiating deals with new suppliers, as well as contract renewals.

If your business is its switching / renewal window, we’re here to help you on the way to a better deal.

Compare business gas and electricity prices from UK suppliers with Utility Bidder today. Contact us Monday to Friday, 9am to 5pm on 0800 007 4001