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Flexible energy contracts: How they work and which businesses can benefit most

Flexible energy contracts give businesses control over when their energy is purchased. Instead of fixing a single unit rate for the full contract term, wholesale energy can be secured in stages, allowing organisations to manage market exposure more strategically.

However, flexible energy contracts also place more responsibility on the customer, and if not managed correctly, can introduce additional risks. This guide explains how flexible energy contracts work, outlining both the benefits and the risks. Here’s what we cover:

• What is a flexible energy contract?
• Who are flexible energy contracts suitable for?
• The risks of flexible energy purchasing
• How flexible energy contracts work
• Types of flexible energy contracts

What is a flexible energy contract?

A flexible energy contract is an energy tariff that allows a business to buy the wholesale component of its electricity or gas over time, rather than locking in the full price at the start of the agreement.

Instead of locking in one unit rate for the entire contract term, wholesale energy is bought in “tranches” at different points in the forward market. This enables businesses to spread market risk and avoid fixing all their energy at a single price.

Flexible contracts are generally available to businesses using more than 1,000,000 kWh of gas or electricity each year. They can cover a single site or multiple locations and are typically suited to medium and large organisations with higher consumption that want greater control over how their energy is purchased.

The key benefit of a flexible energy contract

The key benefit of a flexible energy contract is that it allows businesses to gradually hedge energy price risk over time. “Hedging” simply means securing portions of future energy costs in advance to reduce exposure to wholesale market volatility.

To illustrate this benefit, here’s how it differs from alternative types of business energy contracts:

• Fixed contract – 100% of the unit cost is locked in when the agreement is signed. If that day coincides with a market peak, the customer must carry that price for the full term.
• Pass-through contract – 100% of the wholesale element is fixed when the agreement is signed. This can also leave businesses exposed to a single market spike.
• Variable contract – No hedging of price risk, leaving businesses fully exposed to changes in wholesale energy prices.

Flexible contracts sit between these models, allowing energy to be secured in stages rather than relying on a single pricing decision.

Who are flexible energy contracts suitable for?

Flexible energy contracts are designed for organisations that:

• Are high energy users, typically consuming more than 1,000,000 kWh of gas or electricity per year.
• Are prepared to take an active role in managing energy purchasing decisions.
• Understand and can tolerate exposure to wholesale price movements.

This section explains which businesses are most likely to benefit from a flexible energy contract and which are unlikely to be suitable.

Energy-intensive properties

Businesses with energy-intensive properties and half-hourly meters are particularly suited to flexible energy contracts. For these organisations, even small changes in the unit price per kWh can have a significant impact on overall profitability.

Forward hedging allows businesses to secure energy in stages, reducing reliance on a single market price.

Multi-site businesses

Businesses that manage a portfolio of non-domestic properties (retail chains, hotel groups, local councils, etc.) can benefit from grouping all their properties under a single flexible energy contract.

A single contract encompassing a portfolio of MPANs can provide the organisation with centralised control over its energy price risk.

Find out more in our guide to multi-site business energy management.

Businesses with predictable long-term consumption

Certain types of businesses can confidently predict their power requirements many years into the future. These include:

• Cold storage facilities
• Data centres
• Manufacturing facilities

These organisations can take advantage of access to multi-year forward electricity purchases in the wholesale market.

Businesses not suitable for flexible energy contracts

A flexible energy contract is unlikely to be suitable for the following types of business:

• Small businesses – The complexity of structuring a flexible energy contract means suppliers typically will not accept businesses that consume only small amounts of energy.
• Uncertain futures – Flexible energy contracts require businesses to forecast demand accurately several years in advance. Changes to expected consumption can leave organisations exposed to market price risk.
• Cost certainty requirements – Businesses requiring complete cost certainty should instead opt for fixed or pass-through contracts offered by suppliers.

At Business Energy Deals, we specialise in helping SMEs find the best fixed contracts. Use our business electricity comparison or business gas comparison services today.

Can smaller businesses use flexible energy contracts?

Typically not. Suppliers impose consumption and credit score requirements that most small businesses will not meet.

Most business energy suppliers require customers on a flexible energy contract to consume at least 1 GWh of electricity each year. This equates to approximately £250,000 in current market prices.

Suppliers set minimum consumption thresholds for flexible energy contracts because each contract typically requires executing individual wholesale trades. The administrative burden associated with these trades is generally only justifiable for large volumes of energy.

Suppliers also tend to require a strong credit rating, as wholesale forward trades can be made years in advance, exposing them to the risk that the customer may cease trading before delivery.

The risks of flexible energy purchasing

This section highlights the three key risks to consider before choosing a flexible energy contract.

Exposure to rising markets

In a falling market, flexible energy contracts can benefit businesses by allowing them to secure portions of their energy at lower prices.

However, in a rising market, forward purchase prices increase, and a business will usually have been financially better off entering into a simple fixed contract.

Requires active management

Unlike a simple multi-year fixed business energy contract, a flexible contract requires ongoing active management and trading. This typically involves:

• Time invested in deciding on and instructing a hedging strategy, or
• The cost of paying a business energy broker or your supplier’s trading desk to actively manage the contract.

Volume risk

Purchases made under a flexible energy contract rely on an accurate forecast of a business’s energy consumption several years into the future.

If a business’s operations change and energy usage differs materially from the forecast, this can expose the organisation to price risk, as follows:

• Over-hedging may require selling back excess volume at current market prices.
• Under-hedging may expose the business to purchasing additional energy at current market prices.

How flexible energy contracts work

The following step-by-step explanation outlines what happens in an active flexible energy contract for the supply of electricity.

1. Forecast consumption baseline

To manage wholesale electricity purchases effectively on behalf of your business, the supplier must create a forecast business energy consumption baseline, which includes:

• Annual forecast consumption in MWh during each year of the contract.
• Monthly distribution of consumption.
• Expected daily half-hourly consumption profile.

This forecast provides a guide on how much electricity must be purchased each month of the flexible energy contract.

The forecast will typically rely on historical half-hourly energy meter readings received as part of the onboarding process.

2. Establishing a hedge plan

In a flexible energy contract, trades are executed by the energy supplier’s trading team.

These trades are typically executed in accordance with a hedge plan. The hedge plan sets out how forward electricity purchases are made ahead of the delivery date. A typical example is shown below:

• 18 months ahead: 20%
• 12 months ahead: 40%
• 6 months ahead: 70%
• 3 months ahead: 90%
• 1 month ahead: 100%

The hedge plan can be customer-driven, broker-advised or supplier-managed, depending on the type of flexible energy contract.

3. Executing trades

In line with the hedge plan, the energy supplier’s trading desk will confirm tradable prices.

Authorisation is then provided by the customer (or an advising broker) to execute individual trades on the wholesale electricity market.

A trade confirmation is subsequently issued to the customer.

4. Building a blended wholesale price

Ahead of the delivery period specified in the contract, a customer will typically have executed a series of trades to fully purchase the electricity expected to be consumed.

A blended weighted average wholesale price is then calculated, reflecting the average of all executed trades for a particular delivery month.

5. Shaping the hedged position

Most wholesale energy is bought as baseload products, which provide the same volume of electricity in every half-hour period across a given month.

However, a business’s actual half-hourly usage will vary throughout the day. To more closely match purchased energy to expected consumption, suppliers conduct additional trades to adjust the hedged position so it reflects the business’s demand profile.

6. Delivery of power

Electricity is supplied to all properties covered by the flexible energy contract through their individual business electricity connections to the grid.

The final reconciliation between the purchased forward position and actual consumption is settled through intra-day balancing and trading between the supplier and the grid operator, NESO.

7. Monthly billing

Under a flexible energy contract, the supplier will typically issue a monthly business electricity bill, which will include the following cost elements:

Elements of the wholesale electricity cost:

• Wholesale commodity element – The blended wholesale price per MWh derived from trading, multiplied by forecast electricity consumption for the month.
• Shaping charge/(credit) – The net cost of adjusting baseload forward purchases to reflect the actual half-hourly consumption profile of the business.
• Volume charge/(credit) – The net cost of additional unit purchases or sales required to reconcile actual consumption against forward purchases.

Non-wholesale elements of electricity cost:

• Supplier margin or management fee.
• Non-commodity charges (distribution charges and environmental levies).
• Other agreed charges (metering, data and maximum demand charges).
• Climate change levy.
• VAT on business energy.

Types of flexible energy contracts

Flexible energy contracts are an umbrella term for electricity and gas tariffs that use various structures.

This section explains the most common types of flexible energy contracts.

Fuel types

Flexible energy contracts are offered for both electricity and gas. Flexible electricity contracts are more common, and this guide has explained how they work.

In contrast, flexible contracts offered by business gas suppliers are generally simpler because trades on the wholesale gas market are settled daily rather than every half-hour, reducing trading complexity.

Control over purchasing decisions

All flexible energy contracts allow trading on the wholesale energy market. In each case, it is the licensed business energy supplier that executes the trades. However, there are three common approaches to the decision-making process:

• Client-directed – The customer decides when to fix tranches of forward purchases and instructs the supplier’s trading team accordingly.
• Broker-advised – The customer engages an energy consultant who provides advice on forward purchases. Final approval remains with the customer.
• Supplier-managed – The supplier’s trading desk makes purchases on behalf of the customer. The customer receives reporting on executed trades.

Wholesale trading structures

All flexible energy contracts allow some degree of control over trading in the wholesale electricity market.

However, there are different types of flexible contracts, each imposing certain restrictions on how energy purchases are made:

Tranched based flex

Customers are limited to purchasing wholesale electricity in minimum block sizes based on their expected consumption, typically 5% or 10%.

Customers are generally required to be 100% hedged by a defined deadline ahead of the delivery month.

This is the most common type of flexible energy contract and is typically the most accessible structure for medium-sized businesses.

Structured flex

A structured flexible energy contract defines a minimum hedge level for each delivery month. It provides greater trading freedom for larger organisations. A typical structure may include:

• At least 60% hedged six months before delivery.
• At least 80% hedged one month before delivery.

A structured flex product defines the level of wholesale price exposure the supplier is willing to accept.

Index linked flex

An index-linked flexible contract allows an unhedged proportion of electricity purchases to be priced against published day-ahead or month-ahead market prices.

It enables the customer to adopt a strategy that exposes them to wholesale market movements and to decide what proportion of electricity purchases to hedge.

Index-linked flex contracts can either allow unlimited exposure to floating rates or impose minimum hedge limits.

Non-commodity cost treatment

Non-commodity costs relate to the use of electricity networks and environmental levies. The largest elements typically include TNUoS charges, DUoS charges, BSUoS charges, the Renewable Obligation and the Contracts for Difference levy.

There are two common approaches to the treatment of non-commodity costs:

• Fully fixed – For the duration of the contract, the supplier will charge a fixed unit business electricity price per kWh and business electricity standing charge to recover non-commodity costs.
• Pass-through – The supplier passes these costs on as they are incurred each month.

Hedging plans used in flexible energy contracts

A hedging plan provides a roadmap for the forward purchasing of energy ahead of the delivery month. It should reflect the business energy procurement strategy of the customer. This section explains the three most common hedging strategies used in flexible energy contracts.

Time-based layering

Time-based layering is a hedging strategy that makes purchases in the wholesale market at regular intervals over time, regardless of prevailing prices. It is designed to reduce price volatility and is the most common approach for medium-sized businesses.

For example, within a 20-month pre-delivery window, a customer may purchase 5% blocks each month until reaching a fully hedged position.

This strategy can be front-loaded or back-loaded to adjust exposure to market prices.

Trigger-based hedging

Trigger-based hedging is a strategy in which purchases are executed when forward prices fall below predefined levels.

For example:

• Fix 10% if the forward market falls below £80/MWh.
• Fix an additional 10% if the forward market falls below £75/MWh.

This strategy allows opportunistic purchasing at lower price points but requires active management to avoid under-hedging.

Hybrid strategy

Most flexible energy contract strategies use a combination of trigger-based and time-based hedging, combining:

• Base layering (e.g. 50% hedged systematically).
• Opportunistic top-ups during price dips.
• Operating within defined limits (e.g. must remain between 60% and 100% hedged).

Do flexible energy contracts include renewable electricity?

Flexible energy contracts rely on purchasing electricity on the national grid through the wholesale market. Electricity traded in the wholesale market is generated from a mix of sources, including gas power stations, renewables and nuclear power stations.

In the wholesale market, it is not possible to select an individual generation source to purchase electricity from.

However, there are two main options for marking a flexible energy contract green:

Renewable Energy Guarantees of Origin

The Renewable Energy Guarantees of Origin (REGO) scheme provides certification that electricity supplied via the grid has been generated from renewable sources.

UK wind farms and other renewable generators receive REGOs for each MWh of electricity they produce. An energy supplier can offer a green flexible energy contract by purchasing these REGOs from generators and retiring them against the customer’s consumption.

Green business energy contracts using the REGO system typically come at a premium.

Corporate PPAs

A synthetic corporate PPA is a long-term agreement between a business and a renewable generator for the purchase of electricity delivered via the grid.

A synthetic corporate PPA can be layered into a flexible energy contract alongside wholesale market purchases, forming part of the customer’s overall hedged position.

Accessing market data and forecasts in a flexible energy contract

Taking advantage of a flexible energy contract requires informed trading and hedging decisions based on current market conditions and forward price forecasts. Typically, businesses will receive information from the following sources:

Supplier trading desk reporting

The energy supplier’s trading desk will typically provide:

• Live tradable forward prices (on request).
• End-of-day market reports.
• Hedge position summaries.
• Blended portfolio cost tracking.

Broker market reporting

When a broker or energy consultant is involved, customers will typically receive:

• Daily forward curve updates.
• Market commentary.
• Technical analysis summaries.

The broker’s market specialists will translate this information into actionable guidance.

Exchange publications

Forward electricity products are traded on exchanges such as ICE Futures Europe and the European Energy Exchange (EEX).

These exchanges offer market data services that provide access to settlement prices, forward curves and other relevant trading data.

Independent data providers

Larger organisations may subscribe to:

• Energy analytics platforms.
• Forward price curve services.
• Risk modelling software.
• Commodity intelligence services.

These services draw on data from a variety of sources to provide market intelligence and analysis.

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