Fixed or variable prices?

Geopolitics, gas and fuels

Conflict in the Middle East and difficulties with flows through Hormuz affect the availability of liquefied natural gas. Europe competes with other buyers for cargoes that can change destination. The IEA highlights that, during shocks, this competition can cause sharp price fluctuations and that storage alone cannot resolve every supply disruption. [1]

Oil and fuels are also affected by logistical and production difficulties. In its September report, the IEA points to pressure on diesel, falling stocks and disruptions involving the Gulf and Russia's refining system. For a business, this means considering transport and suppliers' costs too. [2]

For electricity, the generation mix, plant availability and exchanges between areas also matter. Weather, water, wind and sunshine change supply and demand; gas and emissions costs affect thermal power generation. Looking at a single price quote is not enough.

Could factories really stop?

On 16 September, Lombardy regional minister Guido Guidesi warned that energy costs risk pushing businesses to reduce or halt production. This is a warning about industrial risk, not confirmation that a general shutdown has already been decided. [3]

The economic mechanism is understandable: if an order does not cover the avoidable costs of production, reducing activity can limit the loss. But a shutdown brings costs of its own, technical constraints and consequences for customers and workers. A fall in energy demand can come from efficiency or from lost production.

Is variable pricing always better over time?

No: phrased like that, the claim is too categorical. Index-linked pricing allows customers to follow price falls but also exposes them to increases. Fixed pricing transfers part of the price risk to the supplier, within the contract terms; the charge may include hedging costs and a premium for that protection.

ACER notes that less flexible contracts protected consumers during the crisis, but subsequently slowed the passing-on of price falls. This does not demonstrate that variable pricing is universally better. [4]

A sound historical comparison requires fixed-price offers actually available on different dates, compared with index-linked pricing over the same period and for the same consumption, including spreads and other charges. Comparing an old fixed offer with today's spot price can be misleading.

Start with the business's margins

Fixed pricing also helps protect margins and liquidity, as well as making part of the costs predictable. I would therefore start with how much the business can spend without compromising its financial balance.

A purely illustrative example: for 1 GWh a year fully exposed to the market, an average change of €20/MWh amounts to €20,000 on the energy component. How much does that affect the company's results?

Businesses selling at prices already fixed may need to protect their purchasing costs. A company with production flexibility and the ability to absorb fluctuations can withstand greater exposure to variable pricing. Where the contract and volumes allow, part of the requirement can be fixed, purchases spread over time and a share kept index-linked. Percentages and deadlines must be based on the company's figures.

A fixed energy price does not mean a fixed total bill. Consumption, components excluded from the fixed price and the terms on volumes, renewals and termination still apply.

This is where useful work begins

My view is that we need scenarios: an easing of tensions, their persistence and a deterioration. For each, we need to measure the impact on the business, then choose an affordable level of protection.

At the same time, efficiency, self-consumption and load management should be assessed, with investments justified by actual consumption. A sound energy decision should allow the business to keep working even when the market moves in a different direction from the one hoped for.