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White paper: Energy contract types

By Benedict De Meulemeester

By Benedict De Meulemeester on 14/12/2017

Energy contracting is not just about selecting the cheapest supplier. Energy suppliers offer a myriad of contractual possibilities. Comparing the different offers means that you have to make sure that they are similar. And you have to make sure that the contract that you’ve chosen is well adapted to the needs of your organization. Insight into contract types can help you with this.

The blog article below gives you a taste of our white paper on energy contract types. If you'd like to know everything about energy contracting, you can download our white paper instead

What types of contracts you get offered, depends on the status of a market. The more mature a market, the more possibilities to finetune the properties of your contract to your particular needs.  An important factor in the typology of energy contracts is the method applied in a contract for the determination of the end consumers’ price based on the price in the wholesale market. When offering a fix price for energy, suppliers will perform operations in the underlying wholesale market. How this is translated into the retail market price that you pay to your supplier is the basis of a whole set of choices in your contract. The most important properties are:

  1. Price hedging mechanism: One shot forward fixing – flexible forward fixing – spot indexation
  2. Hedging actor: Hands-off versus hands-on approach
  3. Structure of the hedges: Capacity bands or % of expected volume
  4. Balancing party: The supplier or the client
  5. Available products for hedging: Cals, Q’s, M’s, Seasons, etc.
  6. Hedging medium: Physical hedging or financial hedging
  7. Hedge timing: OTC or settlement price
  8. Two-way hedging: Unfixing allowed or not?
  9. Non-commodity arrangements
    • Split billing or cascade
    • Pass-through or included
  10. Formula type: Combinations of fixed parameters and market parameters
  11. Volume arrangements: Limited or unlimited bandwidth
  12. Exotic features: Options, tolling agreements, commodity swaps, etc.
  13. Green energy: Green or not and what quality of green

Next to that, energy contracts can contain conditions regarding payment, billing services, online portal services, volume optimizations, marketing of interuptibility, etc. They can distinguish one offer from another and be the determining factor in your selection of a supplier. However, they are not a distinguishing factor as to contract type.

Combinations of the thirteen properties cited above can lead to a wide variety in contract types that are offered to you. This creates important challenges for the energy buyer:

  1. You need to be sure that you interpret offers correctly and that you are not surprised by unexpected costs or risk.
  2. When comparing offers, you need to be sure that you are comparing similar contract types.
  3. You need to make sure that the complexity of your contract fits your risk management needs and operational capabilities. Complex enough to eliminate risks but not too complex to be executed.

Choosing the right contract type is therefore a key element of success for the energy buyer. Order our whitepaper if you want to gather in-depth insight into how the properties above determine with which kind of contract you are buying energy.

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