I never really stopped to consider the vast amount of options available for some of the most mundane items we need. Standing in Target recently, I contemplated the purchase of a toothbrush for far too long as I weighed the brands, style, color, bristle stiffness and other options available. I mean, there must have been no fewer than thirty different choices. Shaking her head, a woman next to me who was equally perplexed said, “I’m just going to pick the cheapest one… they all end up in the same place eventually…”
I took her advice.
It’s a different story altogether, as many business owners and managers are struggling with a similar problem when it comes to their energy supply. Aside from the multitude of Retail Energy Provider companies out there offering procurement services versus the local utility company, there are a host of options available that should be carefully weighed, each with its own advantages and disadvantages. Some options include, “block”, “heat rate”, “nodal” and “variable” rate programs. However, in this article, I’d like to review two of the more commonly presented options, “fixed” and “index”, to address management of commercial electricity costs.
A pure fixed rate plan is as it sounds. Your business locks in a fixed price per kilowatt hour (kWh) for some predetermined length of time. A term could be any length of time that provides you the best price and other desired options, taking into account your consumption amount and patterns, load factor, capacity and transmission charges, seasonality and a variety of other factors. (Please see http://www.businessdistrict.com/timing-is-everything/ “Timing is Everything”, a previous piece that explains the importance of term and timing of energy supply agreements). A fixed rate plan can be a good option for a company seeking budget certainty or protection from market volatility.
An index plan gives a business the opportunity to purchase at the varying prevailing market prices for electricity. This can be for as specific a period as each given hour in a day, corresponding to a published market index while fixing the adder to the wholesale energy component. An index plan is a more aggressive product, and would be a fine fit for a company looking for the flexibility to shop around, or for a position that allows them to take advantage of wholesale market price drops. A company may “float” on an index price, constantly watching the forward market for the right opportunity to lock in. While the index might be relatively cheaper to the fixed rate, the index can rise precipitously during peak demand periods in the very cold winter and/or very hot and humid summer periods.
Advantages for some may mean disadvantages for others.
With a fixed rate plan, your price certainty comes with a factor of some variable load cost, which reflects the variable risk the energy provider must take on in its hedge, by offering a fixed price over a period of time. The fully unitized fixed rate plan can also mitigate the risk of the utility’s peak-demand charges on the supply side of the bill as they would no longer apply. Most small/medium businesses will seek the Fixed Price option for budget certainty and the potential for year-over-year savings versus local utility supply pricing.
With an index plan, it’s the customer that absorbs most or all of the risk, and no variable load cost is associated, since pricing is in ‘real-time’. A large commercial or industrial company (i.e. manufacturers) may seek an index price option (or hybrid, also referred to as a ‘block’ plan, with only a percentage of their load on an index plan), where consumption is large enough to make it worthwhile to change consumption patterns based on anticipated hourly prices. They may opt for example, to use more electricity during off-peak hours (overnight).
While it may be good to have options…
…It’s best to take advantage of the expertise of an energy broker or supplier that can provide you with the analysis and recommendations suited to your business and specific usage patterns. No one option may be right for another business owner, and while there is the potential to realize reductions in your energy overhead, there is no reason to go it alone!
Own or manage a business that uses energy or know someone who could benefit? Message me to get connected with an energy expert who will provide a complimentary commercial energy analysis with no obligation.
Brad Martin is Senior Vice President, Marketing, Mass Market Sales & Services of Genie Energy
About Genie Energy Ltd.:
Genie Energy Ltd. (NYSE: GNE, GNEPRA), through its Genie Retail Energy (GRE) division, is a leading independent operator of retail energy providers and commercial brokerage services. GRE’s providers supply electricity and natural gas to residential, small business and commercial customers in deregulated markets in the United States and the United Kingdom. For more information, visit http://www.genie.com/.