Energy: Flexible deals can defeat price hikes

"Continuing political instability in the Middle East and North Africa, coupled with the aftermath of the Japanese earthquake and tsunami, have pushed up UK energy prices by over 12% during the course of March 2011. Every UK manufacturer is exposed to these volatile markets, but many are beginning to adopt different tactics when buying energy and are turning their backs on the traditional approach of fixing prices on an annual basis. In a rising market, setting fixed prices can seem an attractive strategy, allowing accurate budgeting and offering protection from further cost increases. However, contracts offering fixed prices over a fixed term carry their own risks. Unforeseen events such as the crisis in Japan can move the market in unpredictable ways. If prices fall unexpectedly, energy users with fixed prices are forced to wait until the end of their supply contract before they can enjoy the benefit of reduced costs. Increasingly, UK manufacturers are turning to flexible energy supply contracts with the aim of delivering more competitive prices whatever the market conditions. The benefits are clear: buying energy in a number of tranches, rather than all at once, reduces the risk of fixing prices at the wrong time and provides a valuable indexing effect. Flexible contracts also allow previously purchased energy to be sold back to the supplier. If hindsight shows that energy has been bought at relatively high prices, it can be sold back and then repurchased when the market has softened. This ability to reset prices frees those who would otherwise be trapped with high prices until the end of their energy contract. This focus on making market volatility work for the consumer also allows an energy budget to be extended up to three or four years into the future."