Energy contract renewal due? Advice from our procurement experts

With energy prices currently hitting highs we haven’t seen for over a decade – and even surpassing the 2008 recession peak – you might be questioning whether it’s the right time to renew your organisation’s energy contract. It’s a complex decision, so we asked our procurement experts to provide you with their top tips for renewing your contract with confidence.

A number of factors have caused wholesale energy prices to soar in recent months. European gas storage levels are low, and with nuclear power station closures scheduled for early winter, there’s likely to be a tighter margin between supply and demand this winter. The EU and UK emissions markets have been trading carbon permits in an unpredictable manner, which means carbon prices are rising and pushing wholesale costs up as a consequence. There are also high levels of backwardation for energy prices in 2022 and beyond, which has caused spot prices to rise further.

Prices have been rising for some time now, and we can’t be sure when they will fall again. Much will depend on the weather this winter, as if it’s particularly cold, prices could continue to increase. So if your contract is due for renewal soon, it’s understandable if you’re uncertain about when to buy – here’s what our procurement experts recommend:

Don’t leave it until the last minute

When market prices are as high as they are currently, it can be tempting to wait until the latest possible opportunity to renew your contract – but we would never advise this approach. Prices could fall, but they could also rise further, and you need to mitigate against the risk of further increases to your business.

If your contract is due for renewal within the next few weeks or months, we recommend securing a contract now. Prices may be high, but ‘out of contract’ rates are even higher, so it’s important to have a contract in place before your renewal date. Taking current prices into account, you may decide to opt for a short-term contract of six months or similar, so that you have the chance to secure a better price if the market falls over the coming months.

If your contract isn’t due for renewal until the April 2022 period, you have slightly more time to make a decision. If we have a mild winter, prices could fall, so it may be worth waiting until the new year to secure a new contract. However, you should always consult your organisation’s risk management strategy before you decide to make or delay a purchasing decision.

Consider a flexible approach

The energy market has become increasingly volatile in recent years, and we can expect to see ongoing price fluctuations and regular ‘peak and recover’ cycles over the coming years. This means that the price your business pays for its energy can vary significantly depending on when you make a purchase.

If you secure a contract today, the price you will pay for your energy is likely to be high, but prices could fall over the coming months – which is why we recommend taking out a flexible contract. When you take a flexible approach to energy buying, you can choose how much energy you would like to buy and when, which enables you to take advantage when market prices fall. While prices are high, as they are now, you could choose to make more regular purchases, buying ‘little and often’ to ensure you’re only paying high prices until wholesale prices fall again. When market prices do fall, you can then buy a greater volume of energy to protect your business when prices inevitably rise once more.

Of course, it’s important to understand your organisation’s appetite for risk before entering into a flexible contract. If budget certainty is more important to your business than securing the lowest prices, a flexible contract may not be right for you – although a robust risk management strategy can help to reduce the risk involved in flexible energy buying.

If you’re determined to take a fixed approach, then you should consider either opting for a very short-term contract (as discussed above) or a longer-term contract that you might usually sign. As future energy prices are forecast to be much lower than current prices, a two, three or four year fixed contract could help you to secure a lower fixed price than a 12-month contract, as the market price is expected to be lower in two, three and four years’ time. However, it’s worth bearing in mind that you will be locking in at that price for longer. If the market falls during the duration of your contract, you could find you’re paying a higher price for your energy than your competitors on flexible contracts.

Seek expert advice

Choosing the best time to buy energy and securing the optimum contract for your business can be incredibly complex, even when market prices are low. That’s why it’s important to ask for support from independent energy specialists, like Inspired’s procurement team.