Types of Energy Procurement Contracts

Today's energy procurement contracts can be structured in various ways. There is, however, no standard formula for determining which contract will best meet a company's energy procurement requirements.

Fremont, CA: When it comes to energy procurement, a company should look for a provider who offers competitive pricing and a solution that is tailored to their individual needs. Depending on the industry, many firms have specific energy usage requirements, and partnering with the correct supplier assures improved efficiency.

When it comes to energy procurement, a company should look for a provider who offers competitive pricing and a solution that is tailored to their individual needs. Depending on the industry, many firms have specific energy usage requirements, and partnering with the correct supplier assures improved efficiency.

Types of energy contracts

Fixed, indexed, and block and index contracts are the three main types of energy procurement contracts.

Fixed contracts

A fully fixed energy pricing plan binds the consumer to a fixed price for the period of the contract, which might be long or short. The price per kilowatt hour remains constant throughout time, regardless of market variations. A fixed pricing plan is generally chosen by customers to provide budget predictability and to mitigate monthly regional price risk. It's especially advantageous in a market where prices are likely to rise further. If market prices decline over the contract's life, however, the company will be locked into its higher pricing and will not be able to benefit from the reduced market rates. Buying at the top of the market when prices are rising, only to see the market fall and prices come down, is a risk.

Indexed electricity pricing

In comparison to a fully fixed contract, a fully indexed electricity pricing plan is on the other end of the spectrum. While all aspects of a fully fixed price are locked at a fixed rate, indexed pricing components are passed on to the consumer at market settlement prices. Index pricing tends to outperform fixed pricing depending on the timing and duration, but at the risk of blowing budgets due to pricing volatility and exposing customers to potentially dramatic fluctuations in pricing month to month.

Block and index

The "block and index" technique, which combines components of fixed and index pricing, is in the middle of the spectrum. Fixed price "blocks," also known as hedges, are deliberately placed throughout the contract duration to protect against unstable periods. Companies can structure various-sized blocks for on-peak, off-peak, or around-the-clock time frames to hedge as much or as little as they would like. Hedges can also be built in over time until companies reach a price that is completely fixed.

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