Fixed price or variable price - what is the best way to buy energy?

The revolution taking place before our eyes in the energy sector often confronts us with difficult choices. Unstable external conditions, an increasing number of new regulations and previously unknown mechanisms make us face more and more dilemmas over time.

In view of the impending dynamic tariffs and a true liberalization of the energy supply market, let’s try to answer the question of whether a fixed price is better or, should we opt for variable pricing linked to the Day-Ahead Market (remember that frozen energy prices for companies will remain in force for a short time yet!)?

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Energy pricing – is fixed pricing good?

Yes and no.

A fixed price is only good if we anticipate sudden spikes in pricing.  These spikes aren’t usually  associated with natural processes, but rather, with events. Examples might include the war in Ukraine and the re-evaluation of supply vectors, or possible further pandemics blocking supply chains.

In such situations long-term, fixed contracts give us the certainty of a stable price over a defined period. This makes it easier to price our product. The share of energy-related costs will remain constant, and the price won’t surprise us. This all looks good in theory, but the practice of recent years shows that things are not so rosy!

The market reacted to the outbreak of war in Ukraine with a sharp increase in energy prices, especially gas prices, which, without the government's initial cover, led to many businesses becoming less competitive and even bankrupt. A price freeze for small and medium-sized businesses seemed like a saviour!

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However, we didn’t have to wait long for the delivery of hydrocarbon streams to smooth out and prices begin to drop. In the natural order of things, prices on the energy exchange followed suit and began to fall. The fixed rate of 785 PLN/MWh ceased to be attractive as early as January 2023, especially when rates were less than 630 PLN for spot purchases.

With the downward trend proving so steady, the government set a new price of 693 PLN/MWh in October of 2023. At the same time, MWh on the exchange cost just over 450 PLN, and in March 2024 it was already only 336 PLN/MWh! As we can see, the outbidding is really big and a fixed price contract may cause us to overpay for energy on a regular basis.

Suppliers who offer a fixed energy price for multi-month contracts are forced to factor the risk of exchange fluctuations into the price. This means that it will always be higher than the price from the Day-Ahead Market.

Day-Ahead market - what is it?

The Day-Ahead Market (DAM) is the spot market for electricity in Poland. Prices on the DAM are the reference for energy prices in bilateral contracts in Poland.

From a practical point of view, it looks like the seller, e.g. Photon Energy, makes purchases on behalf of their customer daily, for the next day. The price is indicated separately for each hour of the day. Spot purchasing allows electricity purchases to be billed at hourly prices and, as of June 2024, at fifteen-minute intervals.

Another term worth knowing is Fixing I. This is the name for the single price system, which sets electricity prices for each hour of the next 24 hours. This is done by 10:30 every day. This is also when the Polish Power Exchange (POLPX) aggregates all buy and sell orders placed by market participants like generators and trading companies. This creates supply and demand curves. The intersection of these curves determines a price that is transparent and uniform for all and is eventually officially published by the POLPX. By buying in the spot model, the customer has the option of settling their consumption at a specific hour, at the correct price for that hour.

The benefits of spot contracts

What is the result of all this? First and foremost, an offer based on the DAM gives you the opportunity to adapt more flexibly to the market situation. It also allows you to make changes to the way you run your business and shift some of your energy consumption to cheaper hours of the day to generate additional savings.

In addition to savings on price, paying close attention to the hours your business consumes energy in combination with additional products, like the Power Market or system services, can result in further energy cost reductions. The Power Market and system services ensure a guaranteed remuneration for a flexible approach to energy consumption. For example: reducing or increasing energy consumption on call. Of course, to realize the biggest savings, it would be most advantageous to approach an energy supplier that has these services in its product portfolio. Buying a bundle of services is always cheaper than buying several services separately. In addition, based on synergy, the cost of energy in a company can be significantly reduced.

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So, is the fixed price that we are used to and are afraid to move away from a guarantee of a good decision?

Not always.

Although fixed pricing provides a sense of stability and a hedge against sudden price increases, recent years have shown that it can lead to overpaying, especially when market prices are falling. Understanding market mechanisms and being flexible in your approach to purchasing and the way you consume energy can be key to reducing costs -  even with the inherent risks of relying on exchange prices. This holds true even for more cautious, tradition-bound customers now that many energy suppliers offer a hybrid pricing option that  combines the security of a fixed pricing with the advantages of a spot price.

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