Fixed or variable energy prices?

Geopolitics, gas and fuels

The Middle East conflict and disruptions to flows through the Strait of Hormuz affect the availability of liquefied natural gas. Europe competes with other buyers for cargoes that can change destination. The IEA highlights how this competition can amplify volatility during supply shocks, and how storage alone cannot address every disruption. [1]

Oil and fuels also face logistical and production constraints. The IEA’s September report identifies pressure on diesel, falling inventories and disruptions involving the Gulf and Russian refining. Businesses therefore need to consider transport and suppliers’ costs too. [2]

Electricity prices also depend on the generation mix, plant availability and trade between regions. Weather, water, wind and sunshine shift supply and demand; gas and emissions costs affect thermal generation. A single market quotation is not enough.

Could factories really stop?

On 16 September, Lombardy’s economic development councillor Guido Guidesi warned that energy costs could force companies to reduce or stop production. This is a warning about industrial risk, not confirmation of a widespread shutdown already decided. [3]

If an order cannot cover avoidable production costs, reducing activity may limit losses. However, shutdowns bring their own costs, technical constraints and consequences for customers and workers. Lower energy demand can reflect greater efficiency or lost production.

Is variable pricing always better over time?

No: that claim is too categorical. Indexed pricing allows a business to benefit from falling prices, but also exposes it to increases. Fixed pricing transfers some price risk to the supplier within the contract terms; its price may include hedging costs and a premium for that protection.

ACER observes that less flexible contracts protected consumers during the crisis, but subsequently slowed the transmission of price reductions. This does not establish that variable pricing is universally superior. [4]

A sound historical comparison needs the fixed offers actually available at each date, compared with indexed costs over the same period and for the same consumption, including markups and other charges. Comparing an old fixed offer with today’s spot price can mislead.

Start with the company’s margins

Fixed pricing can protect margins and cash flow, as well as making part of expenditure predictable. I would start with what the business can afford without undermining its financial balance.

A purely illustrative example: for 1 GWh of annual consumption fully exposed to the market, an average change of €20/MWh means €20,000 on the energy component. How much does that affect earnings?

A business selling at agreed prices may need to protect purchasing costs. Another with production flexibility and the ability to absorb fluctuations may tolerate more variable exposure. Where contracts and volumes allow, companies can fix part of their needs, spread purchases over time and retain an indexed share. Percentages and dates should follow from the company’s figures.

A fixed energy price does not mean a fixed total bill. Consumption, excluded components and terms covering volumes, renewals and termination still matter.

Where useful work begins

My view is that we need scenarios: easing tensions, persistent disruption and deterioration. For each one, measure the impact on the business and then choose affordable protection.

Alongside purchasing decisions, assess efficiency, self-consumption and load management using actual consumption. A good energy decision should let the business keep operating even when the market moves in a different direction from the one hoped for.