Practical affordability: why cheaper doesn’t always mean better

The instinct to secure the cheapest available energy contract is understandable. Energy is a significant operating cost, budgets are under pressure, and procurement teams are often measured on the savings they deliver. For a long time, comparing unit rates and locking in the lowest price was a reasonable approach.

This strategy still has its place, but in a market where more than half the bill sits outside the wholesale rate, and where volatility, demand patterns and contract structure all influence total cost, the cheapest contract may not always deliver the lowest bill.

Will market volatility start to subside?

While nobody can predict the future, it’s likely that wholesale energy markets will remain volatile for some time to come. The effects of Russia’s invasion of Ukraine are still being felt, ongoing instability in the Middle East continues to affect global fuel flows, and gas still sets the marginal price of UK electricity in many settlement periods. While prices have retreated from the extremes of 2022, they remain well above pre-crisis levels, and sharp movements have become a recurring feature.

In this environment, the timing of a purchasing decision carries real financial consequences. Fixing an entire volume at a single point can expose your organisation to the risk of buying at or near a peak. If the market falls shortly afterwards, any apparent saving can disappear.

Layered purchasing, where volume commitments are spread across multiple points over time, reduces this risk. It won’t guarantee the lowest possible price on any given day, but it can smooth cost and limit the impact of adverse market movements. Here the objective is not to beat the market, but to reduce the impact if it moves against you.

How does forecasting determine the right contract fit?

A competitive rate on paper means little if the contract doesn’t match how your organisation actually uses energy.

Load forecasting has become more important, but also more difficult. As organisations electrify vehicles, heating and industrial processes, demand profiles are changing. Electric vehicle charging introduces new peaks, heat pumps increase winter electricity consumption, and electrified processes can create higher, more concentrated loads. In many cases, these changes mean historical consumption data may no longer be a reliable guide to future requirements.

Procurement decisions based on outdated demand assumptions can then lead to over- or under-contracting. Over-contracting means paying for energy that isn’t needed, while under-contracting can trigger penalty charges or force purchases at unfavourable spot prices. Both have the potential to erode the value of whatever unit rate was originally secured.

Regular review of demand data, updated forecasting and closer alignment between procurement and operational planning can help reduce this risk. The goal should be to agree a contract that reflects how energy is used now and how usage is expected to change in the future.

How should peak demand be managed?

Even with a competitive unit rate and accurate forecasting, total cost can be pushed significantly higher by peak demand. Also, many non-commodity charges are weighted toward periods of high demand. Distribution and transmission network charges, capacity costs and certain policy levies are all influenced, not just by how much energy is used, but when that electricity is drawn from the grid. Organisations with spiky or poorly managed demand profiles can find themselves paying a premium that is not connected to the unit rate on their contract.

This is where tariff selection plays a direct role. The structure of a tariff can determine how peak demand is priced and how flexibility is rewarded. A tariff that penalises demand spikes may amplify costs for an organisation that hasn’t addressed its load profile, while a tariff designed to reflect actual operational patterns could reduce exposure to the same charges.

This is an area where procurement and operations need to work together. Procurement teams benefit from visibility of demand patterns, and operations teams need to understand how those patterns affect cost. With that shared view, decisions can be made together, and the benefits compounded.

What’s in the small print?

Beyond unit rate, volume and tariff structure, the terms of the contract itself can be a source of unexpected cost.

Pass-through clauses determine how changes in regulated charges are handled during the contract period. Some contracts absorb these changes within the agreed rate, but others pass them through directly, meaning the bill can increase mid-contract even if the wholesale rate hasn’t moved. Given the trajectory of non-commodity charges, the difference between these structures is important to be aware of.

Volume tolerances set the band within which actual consumption can vary from the contracted amount before penalties apply. If those tolerances are too narrow, or if demand changes during the contract period due to electrification or operational changes, the organisation may be exposed.

These details are where the difference between a cheap-looking contract and an expensive outcome is often felt. Understanding them before signing is the most effective approach.

What question should we be asking?

Practical affordability in 2026 means asking a different question. Not “what is the cheapest rate available?” but “what is the total cost of this contract, given how we use energy, how that usage is changing, and how the non-commodity cost landscape is evolving?”

That question can lead to better procurement decisions, as well as to the next consideration: how procurement decisions now affect something beyond cost.