Find out what the three main differences are between a fixed price and an indexed price for your company's electricity

First: The price of supply

The first difference, and perhaps the most obvious, lies in the price applied to energy consumption in each case.

If you opt for a fixed price, the total kilowatts in each monthly invoice for the duration of the contract will always be multiplied by that agreed price. It could be a single price, or there could be a price for each time band, since by law electricity tariffs include specific defined schedules consisting of time bands (for example, from 12 midnight to 8 am) that are usually cheaper, and other time bands that are more expensive, depending on the day of the week, the month of the year or the territorial area for the supply. In any case, with a fixed price you will always know how much you are going to be charged for the energy you use depending on when you use it.

The disadvantage of this fixed price modality is that you will not be able to take advantage of any possible decreases that may arise in the market during the duration of the contract, but this is balanced out by the main advantage which is that you will not run the risk of possible increases in the market price, since you are protected from that with an agreed fixed price. In short, there is no volatility because the price is fixed.

However, if you sign for an indexed price, the cost per kilowatt will vary depending on the market reference against which the indexing has been made. The usual agreement is for this reference to be the price on the official wholesale market, also known as Pool and operated by OMIE, in which case for every hour of the day during each day of the year the price will be different, since it will be the price quoted at all times on this market. Although a reference to the OMIP market can also be agreed, which quotes future prices and these may be more stable, especially if prices are reviewed quarterly or half-yearly. In one way or another the price will vary at all times and will not be subject to a value known in advance, unlike what happens with a fixed price.

What happens here is the opposite of what happens for a fixed price, that is, the disadvantage is that you will have to assume the risk of possible increases in the market price, since your price is not protected, but the advantage is that you will be able to take advantage of any possible decreases in market prices. In short, you are exposed to the volatility of ups and downs in the prices on wholesale markets.

However, it is worth mentioning that if indexing occurs quarterly as in the case of OMIP above, prices will only vary every three months, respecting the price established for the quarter for the whole of the quarter.

Second: The invoice

The second main difference lies in the invoice that is usually issued depending on whether the price applied is fixed or indexed.

In the case of a fixed price, the invoice will normally be simpler, since the number of kWh consumed are multiplied in the corresponding line on the invoice by the price agreed in the contract, and the result of this operation is the amount to be paid for the month. Always remember that it could be a single fixed price, or a fixed price for each time band, in which case the logic is the same, but there may be an invoice line for the number of kWh consumed in each time band.

However, in the case of an indexed price, what usually happens is to firstly invoice the market cost, based on the price resulting from the wholesale market to which the variation in the contract has been indexed, and secondly to invoice the tolls, charges and regulated components for the energy term.

And that is because these regulated components are established as a result of public regulations. They only usually vary annually and are already included in the fixed price.

But because in the case of the indexed price the market component of the price will change, it may be that in each invoice or hourly period invoiced it is necessary to separate both concepts, to make the indexed price applied suitably transparent at all times.

To summarise, the above clearly shows that indexed price invoices will tend to be more complex than fixed price invoices.

Third: Duration

The third difference between these two modalities for contracting the price of electricity for your company lies in the fact that, if you request a fixed price, the company will tend to establish a fixed duration for the contract, with a penalty in case the client terminates it early to change to another tariff or another company.

This minimum duration is usually linked to the period during which it is agreed that the fixed price will not vary for market reasons (that is, regardless of whether the market rises or falls). For example, in a twelve-month fixed-price contract, a twelve-month duration will be required, while if the twenty-four-month fixed price is secured, a two-year duration will be required of the customer.

The reason for this fixed duration is based on the fact that the electricity retailer has to buy in advance the energy expected to be supplied during that period at a price that will enable it to ensure the fixed price agreed with the client since otherwise it would be taking a risk that cannot be assumed (because of the difference between the agreed price and the price at which the energy may be quoted at any time during the validity of the contract). In this way, if the client terminates in advance, but pays a penalty, this will compensate the company for any damage caused as a result of the client not complying in turn with the counterpart that enabled the fixed price to be ensured.

But in the case of contracts with indexed prices, the client is not obliged to contract for a fixed duration since the company does not need to undertake operations in advance to ensure that the price can be fixed, since the price will vary depending on changes in the reference market.

So if the contracting company is not going to be able to comply with the required fixed duration, perhaps it would be better to opt for an indexed contract, but if this is not going to be a problem because it expects to maintain production over the next year or the next few years, perhaps a fixed price is better so costs can be calculated in advance.

With regard to this and the fixed price, it is worth mentioning here and finally that the longer the period to which the company can commit itself to contracting a fixed price, the greater the possibility of obtaining a lower price in return. If the price curve for futures markets points, for example, to a lower price for within three, four, five or ten years, any client who can contract a fixed price by committing to these terms will therefore be able to contract at a lower price.