Fixed vs flexible business energy contracts

When a quote arrives you are normally choosing between two broad ideas. Fixed: lock the energy price for a set time. Flexible: let the price move with the market, or buy in stages. Neither is "better" in general. The right choice depends on how much price movement your budget can tolerate and how much time you can give to managing it.

This page explains how the products work. It is not trading advice, and nobody, including brokers, can predict wholesale prices.

Fixed-price contracts

You agree a unit rate (pence per kWh) and a standing charge (pence per day) for the contract term. Term lengths vary by supplier, so ask what is on offer. The energy price will not change during the term.

Benefits

• You can budget for the year with confidence.
• No need to watch the market.
• Simple to compare quotes on annual cost.

Risks

• If market prices fall, you keep paying the higher agreed rate.
• Leaving early usually brings a termination fee.
• Your supplier may build a margin into the price for the risk it takes.
• "Fixed" often means fixed energy only. Some contracts allow other costs to be passed on, as explained below.

Pass-through vs fixed (non-pass-through) charges

Part of any bill is not the energy itself: network charges, policy costs and taxes. In a non-pass-through (fully fixed) deal, the supplier absorbs changes in those. In a pass-through deal, changes are passed on to you, so the bill can go up or down mid-contract even though the energy price is fixed. See pass-through vs fixed charges in a quote and the glossary entries for pass-through and non-pass-through.

Variable and tracker contracts

A variable tariff is one where the supplier can change the rate, usually after giving notice. A tracker ties the energy portion of your price to a wholesale index plus fees, so the price moves up and down with the market. Trackers can look cheap when markets are low, but your costs follow the market up as well. The exact formula, index and add-on charges are in the contract. See tracker tariff.

Flexible purchasing and basket buying

In a flexible (or "flexible procurement") contract, you or your adviser buy your expected energy in several blocks over time, rather than in one purchase. Basket purchasing spreads purchases across dates or price points to average out the price you pay. The mechanics differ between suppliers, so treat the following as features to ask about rather than fixed rules:

• Purchases are made at different times, by you or by someone acting for you.
• Any part not yet bought is usually charged at market-related rates when it falls due.
• You need a reasonable forecast of usage, as buying too much or too little can mean extra charges. Read your terms on how over- and under-purchasing is handled.

It suits businesses with high, predictable consumption and someone to make decisions. A small shop or salon rarely benefits from the extra complexity. See flexible contract.

Blend and extend

Blend and extend means that, while you are already on a fixed deal, you agree with your supplier to merge your existing rate with today's market rate into one new rate and a longer term. It can soften an expensive old rate, but it also extends your lock-in and can hide the cost of that extension. Read what is blend and extend before accepting one.

Worked example: what a price move does

These rates are made up to show the arithmetic. A café uses 40,000 kWh of electricity a year.

• Fixed at 26.0p: 40,000 x £0.26 = £10,400 for the energy-rate element.
• Flexible rate rises 3p to 29.0p: 40,000 x £0.29 = £11,600, which is £1,200 more.
• Flexible rate falls 3p to 23.0p: 40,000 x £0.23 = £9,200, which is £1,200 less.

Each 1p change on 40,000 kWh is worth £400 a year. Decide whether you could absorb a swing of that size before choosing flexibility. Add standing charges, VAT and the Climate Change Levy on top of every scenario; see VAT and CCL.

Which suits whom?

Your situation	Usually points to
Small premises, tight cash flow, no time for market watching	Fixed, ideally non-pass-through, for a term you can plan around
Fixed deal about to end	Compare a new fixed quote; ask whether blend and extend is genuinely better
Large, steady usage and a dedicated manager or adviser	Flexible or tracker may be worth a quote
Short-term need (moving, uncertain lease)	A short fixed term, or a contract with a reasonable exit route

Questions to ask the seller

1. Which parts of the price are fixed and which can change?
2. What triggers a price change, and how much notice do I get?
3. What is the termination fee, and how is it calculated?
4. How is under- or over-use handled?
5. Is any broker commission included, and what is the total in pounds?

There is no cooling-off period, so get these answers before you agree. See the contract terms checklist.

Common mistakes when choosing

• Fixing because prices have just jumped. A price you lock after a spike can look painful if markets later settle. The reverse is also true. Nobody can time this reliably.
• Choosing flexible for the headline rate. A low starting rate on a flexible product can rise with the market. Check what it would cost if rates rose by 3p.
• Forgetting the exit. Both fixed and flexible deals can carry termination charges. Ask how they work before you sign.
• Ignoring non-energy costs. Network, policy and tax charges are a big part of the bill. In a pass-through deal they can change during the term.
• Not asking about broker pay. Commission can be built into a flexible product's margin just like a fixed one, and should be shown in the Principal Terms.

A note on contract length

Longer fixed terms spread the risk of a market change over more years but lock you in for longer. If you might move premises, sell the business or change your usage, a shorter term or a contract that can transfer to new premises may be worth more than a slightly lower rate. See taking your contract to new premises and how long a contract can last.

Next steps

• Check your current contract type in business energy contracts explained.
• Work out annual cost with the cost calculator.
• Compare options with how to compare business energy.

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