Tariff Procurement for Business: Fixed, Flexible, or Forward Buying?

The contract you choose sets the tone for your energy costs. Get it wrong and you face volatility, budget tension, and margin erosion. Get it right and you gain predictability, confidence, and control. Here’s how to decide between fixed, flexible, and forward buying strategies.

For many business owners and facilities managers, procurement feels like a once-a-year task: get quotes, pick the cheapest, sign the deal. But energy contracts are not all created equal. Each structure shifts risk between you and the supplier. Understanding the difference, and matching it to your organisation’s budget pressures, governance, and appetite for risk, is essential.

Why contract structure matters

Energy is one of the most volatile commodities you buy. Wholesale prices move by the hour, and regulatory changes like the MHHS Programme make bills even more usage-sensitive. The wrong procurement approach can expose you to:

  • Budget surprises: Unexpected peaks blowing through forecasts.
  • Board scrutiny: Leaders forced to explain why energy costs deviate from plan.
  • Margin leakage: Quiet overspend eroding profitability year after year.

The right strategy, by contrast, delivers budget certainty, predictable cashflow, and room to focus on growth rather than firefighting energy invoices.

Option 1: Fixed contracts

A fixed contract locks in your unit rate (pence per kWh) for the duration – usually one to three years. It’s the most common procurement method, and it appeals to decision-makers who prioritise stability over opportunity.

  • Pros: Budget certainty, simple to manage, board-friendly.
  • Cons: You pay a “risk premium” to the supplier, and you can’t benefit if wholesale prices fall.

Best for: organisations that need predictable costs (schools, councils, mid-market firms with tight budgets).

Option 2: Flexible contracts

Flexible (or “pass-through”) contracts let you buy energy in tranches over time, tracking closer to wholesale market conditions. You pay the actual market rate plus supplier fees.

  • Pros: Potential to buy at dips, transparency into wholesale movements, spreads risk over time.
  • Cons: Demands market monitoring, exposure to peaks, harder to explain to a board if prices rise.

Best for: larger organisations with energy literacy and risk management processes (manufacturing, logistics, multi-site operators).

Option 3: Forward buying

Forward buying locks in rates beyond the current contract period. For example, you might secure energy for 2027–2028 while still under a 2025–2026 deal.

  • Pros: Protection against future volatility, early budget certainty.
  • Cons: Risk of overpaying if prices fall, requires strong forecasting discipline.

Best for: organisations with long planning horizons or those sensitive to sudden shocks (retail chains, hospitals, data centres).

Decision framework: which is right for you?

Choosing a contract type is less about market timing and more about organisational context. Ask:

  • Budget certainty vs. opportunity: Do you need fixed numbers, or can you ride some market waves?
  • Governance: Will your board approve exposure to wholesale risk?
  • Resources: Do you have the expertise (or partner) to manage flexible purchasing?

Often, the right answer is a hybrid approach, fixing part of your volume while flexing the rest. This reduces downside risk while keeping some upside potential.

The hidden trap: lowest price obsession

Many businesses chase the cheapest quote without realising what’s under the hood. A “low” fixed price might carry penalties, hidden pass-through charges, or assumptions about your consumption pattern. This is Cost Leakage, small contract details that bleed money over time.

Practical steps for procurement decision-makers

  • Analyse your risk appetite: How much volatility can your budget withstand?
  • Engage finance early: Procurement choices affect board-level reporting.
  • Model scenarios: Stress-test fixed vs flexible outcomes over the next 2-3 years.
  • Validate supplier offers: Don’t just compare p/kWh – compare contract terms in detail.

Final thought: contracts as strategy

Your energy contract is not just a commodity purchase. It’s a financial instrument that shapes your budget, governance, and competitiveness. Fixed, flexible, and forward all have their place. The key is alignment: choosing the contract that matches your business’s financial reality, not just the one with the lowest sticker price.

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