Business Energy Glossary
What is an indexed energy contract?
An indexed energy contract links the unit rate to a published wholesale market index (the GB day-ahead market for electricity, the National Balancing Point for gas). The customer pays the prevailing wholesale price plus a defined adder covering non-commodity costs and supplier margin. The unit rate updates as the index moves, monthly or daily depending on the contract structure. Indexed contracts give full market exposure: the customer benefits when wholesale prices fall and absorbs the cost when they rise.
Indexed contracts are used by larger consumers with the trading sophistication or external advice to manage market exposure. They are not commonly offered to smaller business customers because the variability is too high for typical budgeting needs.
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How an indexed contract works
The customer pays a unit rate calculated as:
Unit rate = Index price + adder
The index price is the wholesale market reference, updated daily, weekly, or monthly depending on the contract. The adder covers non-commodity costs (network, levies, taxes) and supplier overhead. The adder is usually fixed for the contract term while the index price floats.
The main UK indices
| Fuel | Common indices |
|---|---|
| Electricity | GB day-ahead market (N2EX, EPEX SPOT), monthly baseload futures, season baseload futures |
| Gas | National Balancing Point (NBP) day-ahead, month-ahead, season-ahead |
The day-ahead index captures the price the wholesale market sets each day for the next day delivery. The monthly and seasonal futures capture forward prices for longer delivery periods. Different indices suit different procurement strategies.
How the price is set
Three common indexed structures:
- Day-ahead indexed. Unit rate matches the day-ahead market each day. Highest variability; full market exposure.
- Month-ahead indexed. Unit rate set at the start of each month based on the month-ahead forward price. Reduces daily noise.
- Seasonal indexed. Unit rate fixed for a delivery season (winter, summer) based on the seasonal forward price.
The customer choose the index that matches their consumption pattern and their tolerance for variability.
Indexed vs fixed vs pass-through
| Feature | Fixed | Pass-through | Indexed |
|---|---|---|---|
| Wholesale cost | Fixed for term | Fixed for term | Tracks index |
| Non-commodity | Bundled fixed | Pass-through at actual | Pass-through at actual |
| Bill variability | Low | Medium | High |
| Market exposure | None during term | Wholesale none | Full |
| Suits | SME, budget certainty | Mid-market, transparency | Large user, market view |
Risk management on indexed
Customers on indexed contracts manage risk through:
- Forward hedging. Buying forward contracts that lock in part of expected consumption at known prices.
- Block and index. A hybrid where a proportion of consumption is hedged at fixed prices and the remainder floats with the index.
- Trigger orders. Pre-agreed levels at which the supplier will lock in a fixed price for a defined portion of consumption.
- Monitoring. Active monitoring of wholesale markets to identify hedging opportunities.
Most large indexed-contract customers work with an energy broker, consultant, or in-house procurement team to manage the market position.
Who indexed suits
Indexed contracts work best for:
- Consumers above 1 GWh per year of electricity or 5 GWh of gas.
- Customers with internal trading or procurement teams.
- Businesses that pass energy costs through to their own customers (and can manage the timing).
- Customers with a strong view that wholesale prices will fall during the contract term.
For SMEs and businesses prioritising budget predictability, indexed contracts introduce more variability than is usually acceptable. Fixed or pass-through structures are usually the better choice.
an indexed energy contract FAQs
What is an indexed energy contract?
A UK business energy contract that links the unit rate to a published wholesale market index. The customer pays the prevailing wholesale price plus a defined adder for non-commodity costs and supplier margin.
What indices are used for UK indexed contracts?
Electricity: GB day-ahead market (N2EX, EPEX SPOT), monthly and seasonal baseload futures. Gas: National Balancing Point (NBP) day-ahead, month-ahead, and season-ahead forwards.
How variable is an indexed contract?
Highly variable on day-ahead indexed contracts; less on month-ahead or seasonal indexed. The customer takes full market exposure: prices can move materially day to day with market conditions.
Can I hedge on an indexed contract?
Yes, through forward purchases that lock in a portion of expected consumption, block and index structures that hedge part of the volume, or trigger orders that lock in fixed prices at pre-agreed market levels.
Who offers indexed contracts in the UK?
Larger suppliers serving the corporate market. Indexed structures are usually available only to consumers above 1 GWh per year of electricity or 5 GWh of gas.
What is block and index?
A hybrid contract where a proportion of consumption is hedged at fixed prices (the block) and the remainder floats with the wholesale index. Allows partial hedging without full exposure or full lock-in.
Is indexed cheaper than fixed?
It depends on what wholesale prices do during the term. Indexed contracts can be materially cheaper than fixed if prices fall, materially more expensive if they rise. Over multi-year periods the average tends to be similar.
Should I choose indexed for my business?
Only if you have the trading sophistication or external advice to manage the market position, and tolerance for monthly or daily bill variability. For most SMEs, fixed or pass-through is more suitable.