What are we actually buying when we sign an energy contract?

The price is the most visible part of a division of risk

A contract divides risk between the buyer and the supplier. The price is the most visible result of that division, but not the only one — and usually not the most important.

It all starts with the forecast. Annual consumption off the invoices is not enough. What is needed is the consumption profile, for electricity preferably in 15-minute intervals, together with a plan of what will change: a new production line, a solar installation, a heat pump in place of a gas boiler. Only then do we choose the purchasing model, the timing and the contract period.

Eleven things that decide the bill

Then it is time to look deeper. Here is the list worth going through item by item before comparing two offers on price.

1. Demand forecast — the 15-minute profile, seasonality, the investment plan.
2. Purchasing model — fixed price, index, tranches or a blended model.
3. Timing and contract period — the rules for taking the decision, the mandate and the risk limits.
4. Full cost — margin, trading fees, the cost of profile, taxes.
5. Pricing formula — which index sets the price, how it is averaged and weighted by consumption, in what currency, with what caps.
6. Volume and flexibility — minimum and maximum offtake, the tolerance band, the rules for adjustments.
7. Profile and balancing — who forecasts, who nominates and who pays for deviations.
8. Distribution — the tariff structure, contracted power, the cost of exceeding it.
9. Legal terms — the general terms and conditions, renewal and termination rules, penalties, pass-through of new regulatory costs.
10. Supplier creditworthiness — collateral, payment terms, continuity of supply.
11. Settlement and control — metering data, corrections, invoice verification.

The tolerance band in point six deserves a sentence of its own, because it determines how far offtake can move without additional cost — and it is often the item a company pays most for without realising it.

Electricity and gas read differently

With electricity, what matters is that the profile is settled in 15-minute intervals — so shifting consumption has a measurable value. Negative prices come into it too, along with the question of whether the benefit reaches the buyer or stays with the supplier. A solar installation, storage or a PPA changes the picture of surpluses and balancing. On the distribution side, capacity charges and reactive power count. Guarantees of origin are a separate subject, and an important one for ESG reporting.

With gas the logic is different. Seasonality, weather and production shutdowns drive it. Take-or-pay appears — the obligation to pay for the contracted volume even when it is not taken — and has to be set against any plan to electrify heat. Then come nominations, that is declarations of planned offtake, contracted capacity and supply constraints, with settlement in kWh, converting cubic metres through a conversion factor.

The twelfth item, which changes the rest

We usually approach this as follows: the site has a given consumption profile, so a suitable contract has to be found for it.

The Energy Manager analyses historical data and limits risk: choosing a fixed price, buying in tranches, negotiating a wider tolerance band. Every transfer of risk to the supplier costs something, and that cost is built into the offer.

The possibilities widen when the Energy Manager has an EMOS able to control the loads across the whole site: refrigeration, HVAC, compressors, fleet charging. A system limited to managing a battery will use only part of that flexibility.

The consumption profile then becomes something we have influence over.

The same contract, a different profile

Where settlement follows the price of each 15-minute interval, part of the consumption can be moved out of the expensive periods into the cheaper ones. Four items of the agreement then look different.

• Indexed price. A given profile means full exposure to price spikes. A managed profile means consumption shifted into cheaper intervals.
• Tolerance band. Without control you have to buy a wider band and pay a higher margin. With control, offtake is easier to keep inside the band you already have.
• Contracted power and tariff periods. Without control you contract spare capacity just in case. With control, peaks are watched as they happen.
• Deviations from forecast. Without control they are settled after the fact. With control, part of the offtake can be matched to the forecast before it becomes a deviation.

All of it within the limits of process requirements, safety and comfort.

There are limits

Shifting consumption will not solve a minimum annual offtake obligation if production drops substantially. Nor will any amount of control rescue an agreement that by design takes the buyer's influence over the outcome away.

Which is why technical flexibility and contract terms have to fit each other — and why they are worth settling together, rather than in two separate processes run by two different departments.

What this changes in choosing a contract

When assessing an indexed offer, we factor in the ability to respond to prices. We size contracted power knowing which peaks we can cut. And it becomes easier to judge which protections are worth paying a supplier for, and which risks we can manage ourselves.

Because before paying for one more protection in the contract, it is worth checking how much flexibility the site already has.

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