Index vs. Fixed Pricing Programs – Which Best Suits my Energy Needs?

Published: December 22, 2017

Energy is a commanding line item on a business’s operating budget and continues to have a more significant impact. Developing an energy strategy can reduce costs and mitigate risk. However, a one size fits all pricing plan does not work for every business. One of the first places Diversegy looks to help achieve a client’s goals is to identify a strategy for an energy supply rate that best suits their needs. With 100’s of suppliers in the energy market place, and a variety of price programs available, a medium to large customer may have an infinite number of options at their disposal. With so many options, comparing apples to apples can become overwhelmingly cumbersome. With basic questions and a review of recent energy bills, Diversegy will provide a complimentary energy analysis. We identify and qualify price options and provide a bidding pool from reputable suppliers that match the customer and their goals.

 

Utilities only offer one rate option: theirs. That rate changes with the market –within some utilities that’s once a quarter and others its once an hour. It fluctuates on a regular basis adjusting for market conditions. Shopping with a supplier offers additional options. The two most common types of pricing are fixed and index. Fixed pricing locks in a rate for a period of time. It also offers transparency as well as budget protection and certainty, the ability to lock in pricing when the market is low. Whereas index pricing allows a customer to take advantage of the market lows, is functionally similar to many utilities’ pricing models, and may be a better fit for customers that are risk tolerant.

 

Fixed

 

Fixed pricing allows a customer to lock in pricing for a set period of time (or term). This type of pricing program is best suited for a customer that is risk adverse, has usage history, and wants to avoid fluctuations in the market – thereby having budget certainty.

 

There are exceptions, and in certain instances a fixed price may change – most often due to regulatory changes. A recent instance is the NITS charge (Network Integration Transmission Service) for PSE&G in NJ, which will be increasing in January 2018.  Any fixed price contracts already in place that go into and beyond January 2018, will most likely see an increase in their charges. Normally suppliers will send a letter ahead of this, and Diversegy tries to notify their customers as well.

 

Typically a fixed rate will be offered in increments of 6 months, with some exceptions commonly referred to as ‘sweet spots.’ Most customers sign an agreement fixing their rates with a term between 24-48 months. When an agreement is signed, the supplier will forward purchase (hedge) the expected usage for the customer, thereby guaranteeing the rate will remain the same throughout the term.

 

The best time to lock in a fixed rate is when the market is low. Often this is in the fall or spring seasons when demand is at it’s lowest. However, Diversegy often sees sudden market lows throughout the year depending on the weather, amount of generation, and demand in the market place. Because we watch the market on a daily (even hourly) basis, we can assist a customer in choosing the best time to lock in their energy procurement rates.

 

Index

 

Index pricing is more commonly known as a variable rate. The rate will go up and down adjusting based on the market. This type of pricing program is greatly appreciated by companies that are risk tolerant and have a good understanding of the market. A fully indexed energy strategy is 100% tied to the spot market. Which, depending on your location and utility, may be the day-ahead or real-time, hourly market.

 

Index pricing can be advantageous to the risk tolerant because it allows you to avoid a price premium placed on a fixed price. Businesses that can operate during off-peak hours can also avoid a ‘time of use’ premium; otherwise they will be charged based on their electricity consumption during peak operating hours designated by the utility.

 

While not often utilized by customers because of the potential for extreme volatility, an index (or variable) pricing program is often a good short-term strategy to ride out the market until a more preferable market period occurs.

 

Block

 

A third price option that is also available is a combination of both a fixed and index. Referred to as a block and index, this pricing program provides a pass-thru structure to allow customers to take advantage of demand reductions. It is ideal for customers that need or want to mitigate market risk but would still like to retain some price certainty, while taking advantage of the low market rates.

 

To figure out which pricing program best suits you and your business’s energy needs, talk to one of our energy experts today for a free energy analysis. Click on the “Free Analysis” button to get started.

 

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