Electricity procurement decisions significantly impact a company's bottom line in today's volatile energy markets. Understanding the strategic implications of the different electricity purchasing strategies is essential for deciding on the best solution that meets one’s needs. Some of the points that commercial and industrial consumers consider are price stability, operational planning, their future view of price movement, and their openness or aversion to price risk.   

Recently there have been many changes impacting the energy industry taking place at the city, state, RTO/ISO, federal, and global level that have increased price volatility, which has made it even more important to make an informed decision when considering electricity purchasing strategies.     

Fixed, Index, and Hybrid Strategies 

Commercial and industrial electricity consumers have three primary purchasing strategies to consider, with each offering different advantages and risks: 

01 Fixed Price Strategy: 

This strategy provides increased budget certainty by contracting electricity usage for a specific term and for a specific price that covers all costs associated with electricity usage. A fixed price strategy protects a consumer from rising prices. However, if a consumer locks in a rate and then electricity prices fall, they do not have the flexibility to benefit from the lower rates since they are locked in through the end of their established term. Fixed strategy terms are usually 1-5 years, but they can be longer or shorter. This is the least effort strategy, which is sometimes referred to as “set it and forget it.” It allows for a consumer to know their electricity rates ahead of time, with the variable for overall cost being the usage. Fixed contracts are appropriate for organizations who want maximum budget predictability or who have strict budgeting requirements.  Note: In some cases, there can be price increases during the term of a fixed contract due to rule changes brought about usually by politicians or policymakers, which impact all consumers on an electrical grid.     

02 Index Price Strategy: 

This strategy is the opposite of the Fixed Price Strategy, in so that instead of locking in a single rate for a term ahead of time based on the electricity futures market, a consumer’s costs will be based on the actual hourly electricity prices that occur in reality on their regional electrical grid for their electricity commodity portion, along with a variable adder charge that covers the associated costs with receiving that electricity at their place of business from the RTO/ISO. The electricity rate that a consumer will pay each month will vary during the term of their contract. This strategy is appropriate for consumers who think that future electricity prices will move down from their current levels during their term. On the other hand, this leaves consumers exposed to electricity price spikes and upward market movement. However, this can be mitigated by a consumer monitoring the energy markets themselves or by having the monitoring done by a consultant, who then uses this information to adjust their electricity purchasing strategy by flipping to a fixed strategy, or by layering in a percentage of usage hedge (LFB see below). 

03 Hybrid Strategies: 

These strategies are some combination of fixed and indexed approaches for a specified contract term. They can be simple or complex. These strategies allow a consumer to hedge the risk of betting their entire budget on what will perform better between fixed and index electricity prices. This turns a 50/50-coin toss into a more strategic approach. If someone has no view of future electricity prices, they may choose to hedge 50% of their usage at a fixed price and have the remaining 50% of their usage be index-based.  No one has a crystal ball, but those who believe that prices may rise in the future may fix 75% of their usage, while having the remaining 25% billed at an index. This would allow a consumer to hedge most of their load at a fixed price with the expectation that prices will move up, but it will leave some room in case electricity prices go the other way. That strategy can be flipped to 25% fixed and 75% index, for those who are more inclined to believe that prices will move down in the future. This will give a consumer some protection in case prices rise, while leaving most of their usage open to benefit from falling electricity prices. There are many options available for hybrid strategies, and they can be more customizable the larger a consumer is. Three general categories for hybrid strategy are:     

1. Fixed adder with Hybrid paperwork: This strategy starts as a combination of the electricity commodity portion as index, and the electricity adder portion as fixed. This can later be flipped to a fixed strategy or to an LFB strategy depending on client size and location.

A possible benefit of locking in a Fixed Adder for a longer term is that it can protect a consumer from price increases due to policy changes linked to the non-commodity costs of their electricity rate during their contracted term. 

2. Load Following Block (LFB): This strategy allows for a percentage of usage of the electricity commodity to be fixed while leaving the remaining percentage as an index for each hour of the contract term.  This can be a simple one-time choice of a single fixed percentage, or it can be made more complex with multiple fixed percentages structured when initially selecting this strategy, as well as additional fixed percentages added during the term of the strategy.  Hedges can continue to be layered in until usage is 100% fixed.

3. Seasonal, Monthly, Hourly Managed strategy: This strategy, available to larger consumers, allows for more complex, structured purchasing strategies to be created and tailored to match a client’s specific needs. There are options that include fixing different percentages: across years, across seasons, across months, and even for different hours of the day. 
 

In Conclusion 

Commercial and industrial businesses face many challenges in optimizing their electricity purchasing strategies. However, effective solutions are within reach with proper market intelligence and strategic planning. The most successful approaches align procurement decisions with broader business objectives while balancing certainty and flexibility in ways that match each organization's risk profile.  

With the currently growing supply and demand uncertainty and price volatility, having assistance to make informed decisions can make a big financial difference. Mantis Innovation guides clients through the evaluation of all available electricity purchasing options to help them find the strategy that best fits their needs. Each client's situation is unique when evaluating their optimal procurement strategy, because each client has different consumption patterns, budget requirements, market outlooks, risk appetites, and usage flexibility, among other factors.   

With Mantis Innovation, the consulting advantage extends beyond the initial purchase decision. There is ongoing consultative support for clients and access to energy market experts, as well as market monitoring available to coincide with purchasing strategies.  

If you would like assistance in navigating the complex energy landscape to make informed decisions, contact Mantis Innovation today.