Advantages and disadvantages of procuring business energy 12 months in advance.
Procuring business energy 12 months in advance is a common strategy, typically executed through a **fixed-rate contract**. This approach acts as a financial hedge against market volatility. However, it requires you to predict your future consumption and market direction.
Here are the specific advantages and disadvantages of securing your energy contract a year ahead of time.
✅ Advantages
**1. Budget Certainty & Stability**
The primary advantage is financial predictability. By locking in a rate, you know exactly how much you will pay per kilowatt-hour (kWh) for the next 12 months. This shields you from seasonal price spikes (e.g., cold winters) and unexpected geopolitical events that could drive prices up, making cash flow forecasting significantly easier.
**2. Protection from Market Volatility**
Energy markets are notoriously volatile. By procuring early, you are essentially “locking in” the current market price. If you wait and buy on the rolling market (or deemed rates), you are exposed to daily fluctuations. If a major supply crisis occurs six months from now, you will be insulated from the price hike for the duration of your contract.
**3. Risk Management**
For businesses with tight margins, an unexpected spike in energy costs can be devastating. Procuring early acts as an insurance policy. It transfers the risk of rising wholesale prices from your business to the supplier.
**4. Front-loading the Workload**
Procuring early allows you to focus on the negotiation and due diligence now, rather than scrambling at the last minute. It gives you time to compare offers, read the full terms and conditions, and consult with a broker without the pressure of an impending contract expiration.
❌ Disadvantages
**1. Missing Out on Price Drops (Opportunity Cost)**
If you lock in a rate 12 months early and the market price falls significantly six months later, you cannot benefit from the lower prices. You are essentially betting that prices will rise or stay the same; if they fall, you lose.
**2. Forecasting Difficulties**
It is hard to predict your energy usage a full year in advance. If your business grows (e.g., adding machinery, hiring more staff, extending hours), your consumption will increase. Conversely, if you implement energy efficiency measures or reduce output, you may be stuck paying for more energy than you need (or paying a high rate for usage you didn’t anticipate).
**3. Supplier Credit Risk**
When you sign a contract a year in advance, you are betting that the supplier will still be in business in 12 months to deliver the energy. The energy market has seen significant supplier failures in recent years. If your supplier goes bust before your contract starts, your fix is lost, and you might be transferred to a much more expensive “deemed” rate with a new supplier.
**4. The “Early Exit” Penalty**
If your business circumstances change (e.g., you close a site or move premises) and you need to cancel the contract before the 12-month period begins or ends, suppliers will charge significant termination fees. These fees are designed to recover the cost of the energy they hedged (bought) on your behalf.
### Summary: Should you do it?
– **It is best suited for:** Businesses that require strict budget certainty, operate on fixed margins, and are risk-averse.
– **It is risky for:** Businesses that are scaling rapidly, undergoing operational changes, or believe that energy prices are currently at a historic high and likely to fall.
**A Note on Strategy:**
Many large businesses do not procure **all** their energy 12 months in advance. Instead, they use a **staggered procurement strategy** (e.g., buying 30% now, 30% in 3 months, 40% in 6 months) to average out the price and mitigate the risk of buying at the peak of the market.