Energy backwardation: is your business ready to benefit from lower future prices?

Your next energy contract deserves attention long before your current one ends. When wholesale prices for future delivery are lower than near-term prices, businesses may have an opportunity to secure more favourable rates ahead of time.

This market condition is called backwardation. Understanding what it means – and having a procurement strategy that allows you to respond – can help your business manage future energy costs.

For businesses eligible for the British Industrial Competitiveness Scheme (BICS), there is another reason to review procurement arrangements: checking how electricity cost relief will reach your bill.

What is backwardation in energy markets?

Backwardation occurs when wholesale energy prices for delivery further into the future are lower than prices for nearer delivery periods.

In practical terms, a business may be able to buy energy for a future supply period at a lower wholesale price than energy being bought for an earlier period.

This can happen when immediate pressures, such as supply disruption or strong demand, affect near-term prices more heavily than longer-term contracts.

However, backwardation does not guarantee that prices will keep falling. It describes the prices available across different delivery periods today. Those prices can change as market conditions and expectations shift.

How could backwardation benefit your business?

When suitable forward prices are available, buying ahead may help businesses to secure part or all of their future energy requirements and improve budget certainty.

The opportunity depends on a business’s consumption, existing purchasing commitments, contract terms and appetite for risk.

For example, a business approaching renewal may be able to explore prices for its next contract before its current agreement ends. A business on a flexible purchasing arrangement may have scope to secure portions of its future consumption at different times.

The starting point is understanding what you have already bought, what remains exposed to market movements and which future periods are available to purchase.

A lower wholesale price also needs to be considered alongside the rest of your bill. Network charges, policy costs, supplier fees and other contract components all affect the total price your business pays.

Do you need a flexible energy contract?

A flexible energy contract can allow businesses to purchase energy in stages rather than fixing the entire requirement in one transaction. This can provide more opportunities to respond to market movements, but it also requires clear purchasing rules and ongoing management.

A fixed contract may also offer opportunities to buy ahead, depending on the supplier and the future start dates available.

The right approach depends on more than business size. Consumption patterns, budget priorities, purchasing volumes and the level of support available are all important.

If you have previously been told that your business is too small for a flexible strategy, it may be worth reviewing the options. The important question is whether an arrangement suits your needs and provides value after all costs are considered.

This illustration might help:

How does BICS fit into your energy procurement strategy?

The British Industrial Competitiveness Scheme is designed to reduce certain electricity policy costs for eligible manufacturing businesses in Great Britain. It provides exemptions relating to the Renewables Obligation (RO), Feed-in Tariffs (FiT) and Capacity Market (CM). Eligibility requirements apply.

These policy costs are separate from the wholesale energy price. This means your procurement review should address two questions:

• Are you buying the energy itself through an appropriate strategy?
• How will any BICS relief be reflected in your electricity charges?

Applying for BICS and reviewing your supply contract should therefore go hand in hand.

Is your electricity contract ready for BICS?

Understanding your tariff and billing structure will help you establish how BICS relief will be applied.

Ask your supplier or energy adviser:

• How are RO, FiT and CM costs included in our contract?
• Are these costs bundled into the unit rate or charged separately?
• What mechanism will adjust our charges when an exemption appplies?
• How will we identify and check the relief on our bills?
  What information does the supplier need from us?

A transparent pass-through mechanism can make changes to individual charges easier to track. If these costs are bundled into your rate, ask for a clear explanation of how the exemption will be reflected.

Government guidance also sets out routes for businesses that cannot resolve concerns about the pass-through of BICS exemptions with their electricity supplier.

The aim is to understand the position before making your next procurement decision, so you can assess the whole contract alongside any relief available.

When should you review your energy procurement strategy?

Waiting until renewal approaches can limit the time available to assess your options.

A review is particularly useful if:

• Your existing contract ends within a period you could purchase ahead for.
• Your energy use or business operations are changing.
• You have unpurchased volumes under a flexible contract.
• You are unsure how your supplier handles changes to policy costs.
• Your business may qualify for BICS.

Reviewing your strategy does not mean you must buy immediately. It gives you the information and agreed decision-making process needed to act when an appropriate opportunity arises.

How Envantage can help

At Envantage, we help businesses buy and use energy more effectively.

Our in-house trading team monitors energy markets every day, helping clients understand price movements and assess purchasing opportunities against their business priorities.

We can review your current procurement approach, explain the fixed and flexible options available, and help you understand how your contract and billing arrangements interact with BICS.

Whether you want to explore future energy prices, assess your BICS eligibility or understand how relief should reach your bill, our team can help you identify your next steps.

Contact Envantage to review your energy procurement strategy and discuss BICS support:

Email hello@envantage.co.uk today.

Categories

• Procurement

Tags

• buying enegry
• Electricity
• energy markets
• Energy prices
• Energy procurement
• procurement strategy

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