Published to LuthINformed, Issue 4 (June 3, 2016)
This is the last of four issues in which we present a broad overview of power and natural gas markets and deal structures. Going forward, we will delve much deeper into the nuances of the energy issues affecting us all. We hope to provide our readers with guidance and actionable information that will be both valuable and useful. As always, your feedback is welcome…
Power Supply Options…
As you probably know, deregulation has not provided price stability. Many retail energy customers are exposed to market fluctuations. For example, any Con Edison full-service customer with a demand over 500kW is subject to Mandatory Hourly Pricing, or MHP (NYISO Day Ahead hourly pricing). So retail customers seeking price protection, or budget certainty, turn to an Energy Supply Company (ESCO) that can offer some form of “price insurance”. Generally speaking, the less risk, the higher the premium. And while ESCOs typically offer many various supply options, the three most common structures our clients use are Fixed Price, Indexed Price, or a Hybrid of the two.
Supply agreements are initially presented as “boilerplates”, but should be negotiated to meet your specific requirements. Be sure to understand any scenarios under which your supplier may be allowed “pass throughs”, since these will affect your final cost. Also, the more complex the structure, the more “active management’ and monitoring is required. An analysis of your Load Profile and Load Factor (below) is essential to determining the product most likely to minimize risk and maximize savings. Load analysis can also be used to apply your historical, hourly profile to historical index prices to establish a cost baseline and benchmark against future performance.
Fixed Price Supply Agreement…
The simplest, and most common, supply agreement is a Fixed Price contract. In this type of agreement, the customer agrees to a fixed price per KWh for an agreed period of time – typically one to three years. This product best suits a customer with a low tolerance for risk because it places most of the risk on the supplier. It also satisfies an organization’s need for budget certainty. However, most fixed price supply contracts carry a certain level of “load risk” since they typically contain usage bandwidths. These bandwidths can be thought of as “buffer zones” which provide a cushion for unexpected usage variations. For example, if your contract allows suppliers to pass on weather related fluctuations, extremely hot weather may push usage outside the buffer, allowing the supplier to charge market prices for the differential – often at a time when prices are highest. A Fixed Price offers protection from upward price swings – but it will also keep you from fully participating in any downward price movement. The benefit of a sustained downward price trend can be partially realized for Fixed Price contracts through a “Blend and Extend” process.
A Blend and Extend agreement is a contract that most suppliers will offer to their clients. If the market moves lower, after you have already agreed to a higher fixed price, the supplier may extend your contract out another year or two allowing you to take advantage of the lower prices. To accomplish this, the ESCO blends the cheaper future rates with your current rate for a new contract that reflects an overall lower price.
Next time we will continue our discussion of supply options with an Indexed Price agreement and Hybrid Product.
Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.