A1 Energy

Understanding Fixed vs. Structured Energy Procurement

08.06.18 08:38 AM By Jon
Understanding Fixed vs. Structured Energy Procurement
Purchasing energy on the open market can be a complicated process. One challenge is to decide which contract type is right for your business.  Commercial energy procurement plans can be fixed, index, or blended.  Which one you pick depends on your company’s risk tolerance for price volatility and your usage needs.


    Fixed Pricing

Fixed pricing paying a set price for a specific period of time. This single rate is attractive for companies that want budget control and a simple way to predict their utility expenses. Because the price is guaranteed to remain the same for the duration of the contract, businesses know with certainty what their energy rates will be.


    Pros: Fixed pricing shields customers from rate increases caused by market fluctuations, supply and demand, and seasonal changes. Though the total utility bill cost varies every month depending on consumption, the rate per kilowatt hour won’t. This option will produce savings over time, especially if you lock in a low rate at the beginning of the contract.


    Cons: Because fixed pricing commits your business to a single rate, you can’t benefit from price decreases. If market rates fall below the contract rate, the price certainty you have secured will have a financial tradeoff. Companies should also expect to experience a rate adjustment when it is time to renew their contract


    Index Pricing


Index pricing gives organizations the option to select the timing and volume of energy at a day-ahead or real-time rate. Especially if market rates are too high to commit to a fixed price contract, index pricing allows businesses to ride out the market until the fixed price is more favorable.


    Pros: Companies can spread out their energy procurement purchases to capitalize on market lows. Businesses can also capture additional savings by lowering energy demand during peak hours when rates are typically higher. This works well for facilities with large energy loads that can be moved to when rates are discounted, such as running chillers overnight to create ice or drawing daytime energy from onsite renewables or a generator.  


    Cons: Index pricing is better for companies with a higher risk tolerance or where budget certainty isn’t a top priority.


    Structured Pricing


    This strategy strikes a balance between fixed and index pricing. Only a portion of your energy consumption is billed at a fixed price while the remainder is subject to market rates. For example, 35% of a building’s energy load could be fixed at one rate while the rest is charged at the index price. Companies using this energy procurement strategy can secure both budget predictability for forecasting and the ability to take advantage of market opportunities.


    Usage Is Everything


No matter which pricing strategy you use, your energy consumption affects the outcome. Suppliers will look at your historical usage to understand your building’s energy profile. They will also need to know if you are planning any major changes that would noticeably lower or increase energy consumption, such as a new addition or a building-wide lighting upgrade


To learn more about minimizing the long-term costs of energy, read our 3 Tips for Strategic Energy Purchasing.