Recently, the Flemish parliament approved a law regarding dynamic contracts in the electricity market. This means that Belgium is one step closer to sustainability in energy usage.
Dynamic pricing for energy is becoming more common around the world, with many countries adopting this pricing model in order to improve efficiency, reduce costs, and promote sustainability. Early adopters like the US, UK, Australia, Sweden, … are therefore paving the way and can be useful examples for all those yet to follow.
What are dynamic contracts in the energy and utilities industry?
Dynamic contracts in the energy and utilities industry refer to agreements that allow for the pricing of energy or utilities to fluctuate in response to market conditions. These contracts are designed to provide a more flexible and responsive pricing mechanism, as compared to traditional fixed-price contracts or variable contracts that have a monthly price, which offer the same price for energy or utilities regardless of market conditions.
Benefits of dynamic contracts for suppliers
1.Flexibility in pricing: Dynamic contracts can allow energy suppliers to adjust their pricing based on changes in demand or supply. This can help suppliers to remain competitive in the market and manage risks associated with price volatility.
2. Increased responsiveness: With dynamic contracts, energy suppliers can be more responsive to their customers’ needs by quickly adjusting delivery schedules, volumes, or energy sources to meet changing demand patterns.
3. Improved forecasting: Energy suppliers can use data from dynamic contracts to improve their forecasting and planning processes. By analyzing usage patterns and trends, suppliers can anticipate demand and adjust their supply accordingly, reducing the likelihood of oversupply or undersupply.
4. Enhanced customer relationships: Dynamic contracts can help energy suppliers build stronger relationships with their customers by providing them with greater control over their energy usage and costs. Customers may also appreciate the flexibility and transparency offered by dynamic contracts, leading to improved satisfaction and loyalty. Customers can also save money if they adjust their energy consumption.
5. Competitive advantage: Energy suppliers that offer dynamic contracts may have a competitive advantage over those that offer only traditional fixed-price contracts. This is particularly true in markets where energy prices are volatile or customers are looking for more control over their energy costs.
6. Enables new business models: Dynamic pricing can enable new business models for energy suppliers, such as demand response programs, which allow suppliers to pay customers for reducing their energy usage during times of high demand
How dynamic contracts contribute to energy sustainability
- Reflects real-time supply and demand: Dynamic pricing allows energy prices to be adjusted in real-time based on changes in supply and demand, which means that customers pay a price that reflects the true cost of energy at any given moment.
- Encourages energy conservation: Dynamic pricing incentivizes consumers to reduce their energy usage during times of high demand or high prices, which can help to reduce overall energy consumption and the need for new energy infrastructure.
- Facilitates integration of renewable energy: Dynamic pricing can help to facilitate the integration of renewable energy sources, which can be unpredictable and intermittent. By adjusting prices based on the availability of renewable energy, energy suppliers can encourage consumers to use this energy when it is most plentiful and reduce consumption when it is scarce.
Benefits for the end user
For consumers, dynamic contracts can offer end users the possibility to adjust their consumption pattern based on sudden spikes in energy prices. This is especially important for businesses, which may be vulnerable to the impact of unexpected increases in energy costs. By entering into a dynamic contract, businesses are offered the possibility to reap the benefits of the price volatility (in combination with smart systems) by adjusting their consumption pattern.
In short, dynamic contracts provide greater choice and control for consumers: Dynamic pricing allows consumers to choose when and how they use energy based on their individual needs and preferences. This can give consumers greater control over their energy bills and help them to save money.
Types of Dynamic contracts in the energy and utilities industry
There are different types of dynamic contract. The most known ones are these 2 models:
- Real-time pricing contracts: it is a type of energy contract that allows businesses to take advantage of market fluctuations and changes in energy prices. With a flex contract, businesses can adjust their energy usage and the price they pay based on the current market conditions. This type of contract is typically more complex and requires businesses to have a good understanding of the energy market, as well as the ability to closely monitor and manage their energy usage. With this contract, you can take advantage of market fluctuations and changes in energy prices.
- ‘Click’ pricing contracts: it is a simpler and more straightforward type of energy contract. With a click contract, businesses choose a % of fix energy price based on future prices for a certain amount and time frame. Once they consumed that locked amount at fixed rates and/or the time frame has passed, the price will be settled back to real-time market prices. Business can decide to lock additional amounts at any moment of time. This allows businesses to have greater budget certainty and predictability, as they know how much they will be paying for the ‘locked’ amount of energy over the contracted term.
Possibilities of dynamic contracts with MECOMS 365
Both types of dynamic contracts can easily be handled in the MECOMS 365 solution.
Once the customer has signed on the type of contract, and it entered the MECOMS 365 system, our pricing engine will do all necessary calculations based on the different data granularity requested. The MECOMS Smart Volume Stream (SVS) gathers all the information from the smart meters to a level up to 15 minutes values which will afterwards be aggregated into hourly, daily or monthly consumptions.
Depending on the contracted market prices, the MECOMS 365 Pricing engine will make use of this smart data already existing in our system to do all the pricing breakdowns calculations based on the data coming from the market and the energy trading prices. As you can see in the example below, many levels of data granularity can be extracted from these complex calculations that happen in the background. Depending on business needs and the level of insights needed for customer to understand their prices, different types of data exposure details can be configured.
However, at the end of the day, the most important outcome, meaning the monthly prices to be invoiced to the customer, will be sent to the billing system for a summary invoice being this the MECOMS 365 CIS solution or an integration with a third party application.
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