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“Stepped and Smooth” large market electricity pricing and what these strategies mean for your business

April 3rd, 2024Written by David Marsh, Sales Manager

When working with our team of dedicated energy brokers for your next business electricity contract, you’ll likely hear a range of procurement strategies and terms that may seem really foreign but are really important. "Stepped and smooth" bill pricing strategies are some of those terms.

Here is our handy guide on the differences between the two bill pricing strategies to help identify what might work best for your business.

Bill pricing strategies for large market contracts

As a big energy user, your usage is classified as “large market” and your pricing is typically priced for a term length of 12, 24, 36, 48 or 60 months. There are two main ways these term lengths will be priced; Stepped or Smooth, which both offer a range of pros and cons for your business cashflow.

What is Smooth pricing?

Smooth pricing is when the usage rates are smoothed over the term length. This means the same peak, shoulder and off peak rate will be locked in for the entire term length selected.

For an energy retailer, there is more risk involved in forecasting the market and therefore they place a premium on smoothed pricing to build in more protection to their pricing model.

Pros of smooth pricing:

  • Ideal for cash flow and forecasting purposes knowing that the usage rates are fixed

  • Easier to understand

Cons of smooth pricing:

  • Typically slightly more expensive than stepped over the duration of a term that’s 24 months or longer.

What is Stepped pricing?

Stepped Pricing typically starts at a higher amount for year one, and then steps down in years two and beyond.

As energy retailers are able to price more accurately based on the current year and future year forecasts, this strategy is more risk-averse for electricity retailers than smooth pricing and therefore often cheaper for a business.

Pros of stepped pricing:

  • Typically cheaper than smooth pricing

  • More often than not, the longer you lock in rates for, the cheaper pricing gets in the later years of the contract.

Cons of stepped pricing:

  • More often than not, the first year is more expensive and the benefits of this model are only realised the longer the contract goes for.

  • It’s harder to understand and forecast for some businesses, particularly if there is a change in businesses energy consumption over time.

Stepped or Smoothed, what is best for your business?

As you can see, stepped and smooth pricing strategies have pros and cons and either may suit a business depending on their scenario, cash flow status and overall priorities.

While smoothed may be better for budget forecasting, often stepped can provide better cashflow if over a long term.

Speak with your dedicated Choice Energy broker if you’re unsure about what the best option is for your business energy contract or give us a call on 1300 304 448.

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