The energy market is constantly evolving and there are various ways to purchase energy. Recently, there have been more and more providers of dynamic energy contracts. Are these also interesting for budget-driven organizations? The alternative is to work with a long-term click strategy, where you spread the purchasing risk over a period of several years. This ensures stability and predictability. We would like to explain the differences between these purchasing strategies and discuss the risks of dynamic energy contracts. We will also discuss changes in the energy market.
What are dynamic energy contracts?
More and more consumers are switching to dynamic energy contracts. With these contracts you purchase your energy at hourly prices that are announced one day in advance. Currently, approximately 5% of households have such a contract. More and more parties are also advertising this option to business customers. But who is actually benefits from this?
Who benefits from dynamic energy prices?
Dynamic contracts are particularly interesting for people and companies that can effectively manage their energy consumption. This means that you use extra electricity at times when prices are low or even negative. Think about charging your electric car or switching on major consumers such as heat pumps and washing machines at the right times.
In addition, you can save by using less energy when prices are high. However, this requires a flexible attitude and the ability to consciously manage energy consumption. Do you have a constant energy demand that you cannot easily adjust? Then you cannot take advantage of the advantageous moments and you pay the top price when prices shoot up, you are then at the mercy of the whims of the market.
The risks of dynamic pricing
While dynamic energy pricing can offer benefits, there are also significant risks involved. A major disadvantage is the unpredictability of the market. We recently saw how low supplies of solar and wind energy drove prices to record highs. These kinds of price fluctuations can be difficult for households and businesses trying to control their costs.
In addition, the expected surplus of solar energy in the summer period will result in negative electricity prices during the hours when solar energy is generated. The remaining hours become much more expensive. Because energy suppliers have to recoup the costs of their gas and coal-fired power plants during the remaining hours, and there is a high degree of unpredictability in the short-term market. This may result in greater price fluctuations and increased risk for users with a dynamic contract.
Budgeting with a dynamic contract is also very complicated. Because your rates are only known a day in advance, you have no certainty about your long-term energy costs. This makes financial planning very difficult, especially for companies with a fixed budget that cannot flexibly adjust their energy consumption.
If you don’t want to take any risks and want certainty about your energy costs, a long-term click strategy – such as that of PowerQ – is a better choice. This way you know where you stand and avoid surprises.
Hybrid solution with batteries and separate administration
Budget-driven organizations that have batteries can, under certain conditions, still benefit from dynamic price differences. By placing part of the energy consumption – for example, charging and discharging batteries – in a separate administrative entity, it is possible to bill only that flexible part at dynamic hourly rates. In this way, strategic purchasing can be done on the spot market, while the rest of the consumption remains covered by a stable purchasing contract. This does require a good set-up of the administrative and technical separation, but can be financially interesting for institutions with storage capacity.
When is dynamic purchasing interesting?
Dynamic contracts can be attractive for those who are flexible and can respond intelligently to price fluctuations by using batteries or changing consumption patterns. But those who prefer stability and do not want to be dependent on market fluctuations are better off choosing a fixed and strategic purchasing policy. Ultimately, the right choice depends on the flexibility of your energy consumption, the percentage of energy costs in the cost of your product, and how many years in advance you are willing to purchase. After all, purchasing further in advance means lower prices on average.
In the graph below, for the delivery years 2021 through 2024, you can see the difference between the weighted average price of the EPEX spot market for the relevant delivery year, which you would be dealing with with a dynamic contract, and the weighted average price you would have achieved if you had already committed 4 years in advance. These are the ‘bare’ purchase prices, without any mark-ups from the supplier.
Want to know more?
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