Power purchasing options vary according to a company's size, location, energy usage and appetite for risk. The five most common types of electricity pricing products are listed below. The first four products also apply to natural gas (with the exception of the blend and extend).
Fixed price-full Requirements
Companies that require budget certainty and cannot bear price risk will select a fixed price-full requirements pricing strategy. "Full requirements" implies that a customer must take delivery of all of the operation's power needs at a certain price rate. Most suitable for the vast majority of commercial and industrial companies. When you include the “Blend and Extend” option provided by many suppliers, this is most attractive. With this, the contract price can be renegotiated (if the market goes down) and the length of term extended.
Fixed Price Block with remainder at index
For companies willing to shoulder some risk but have concerns about letting 100 percent of their energy pricing ride on the index, a block-and-index combination is a good choice. This offers the option of reducing price, while mitigating the risk of variable pricing.
This product lends itself well to a growing business that can layer in additional electricity usage as the business expands. The company can lock in a fixed price up front for a portion of its load and pay the index price for the remaining volumes. This strategy also makes sense if the company wants to lock in portions of the contract price at various times, since the company can buy multiple blocks of power over time.
Average of spot market settlements over the delivery period. Most suitable for industrial companies that can shed load, manage power consumption, pass on the cost of electricity to their customers, or use a majority of their energy during off-peak hours.
Index with Fixed Price Trigger
This allows companies to play the market with the option of locking in a price at a later time. Most Suitable for those willing to bear the risk of paying an index price but also want to take advantage of any market dips to lock in a fixed contract price. Companies considering this option should be able to handle a moderate degree of risk.
Companies typically choose a heat rate product when they want to pay market-based prices and power indexes in the market are not available, or they are not as transparent as gas prices. Heat rate products are most popular when gas prices are expected to decline. Most suitable for companies having a strong commodities hedging function, sometimes choose heat rate-based electricity supply contracts. These companies are looking for ways to tie their expenses to expected revenue streams.
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