EnergyWindow MarketElert TM - March 2004 Supplement
Creativity in the Commodity World
With wholesale gas and electric prices as high as they are now, competitive suppliers are having a hard time offering attractive energy pricing. These higher cost times also result in increased creativity among sales forces being pressed to keep up their sales volume. One way this creativity manifests itself is through the appearance of numerous products that are designed to attract customers even during high wholesale periods. Some of these products are simple, others more complex, but all come with a mix of value and risk that needs to be understood by those being asked to commit to them.
Longer terms - This product is simple enough. If gas or electric futures are lower and lower over the next few years ("backwardated"), you may want to consider taking out a two to three-year term fixed-price contract to average down the cost. Downside: you will be living with the decision for quite some time and may not be able to convert or cancel the contract without significant penalties.
Shorter terms - In some electric markets where utility rates allow for switching on and off without penalties, there may be an opportunity to do short-term fixed-price contracts of 3 to 8 months that avoid high summer costs. In other areas, higher seasonal rates from the utility may mean you can get a better deal by going off tariff for the summer and remaining on the utility for the shoulder and/or winter months. Then, while on your short-term contract, watch the market trends and shop for longer terms when the time seems right. Downside: you will have to shop frequently, and your choice of subsequent term lengths may be limited to increments or multiples of 12-months when coming off the short-term contract.
Indexed rates - In gas, this can be a Henry or other hub-price-based contract with adders for basis, in electricity a wholesale hourly spot price with either fixed or floating prices for things like capacity, transmission, ancillary services, losses, reserves and ISO costs. Where no liquid wholesale market exists, an index off a published utility rate may be substituted. In some areas (notably the state of New York), a variable rate may actually be hedged by the utility (and both tax and shopping incentives also apply to switching customers). Downside: unless prices are hedged, customers are exposed to the full volatility of the energy markets.
Variable to fixed conversion - This type of product takes the form of an indexed rate with a trigger (a price pre-identified as desirable) or an open option to fix the price when forward markets offer the opportunity. Downside: it requires monitoring wholesale markets and faith that the supplier will fix at the right moment instead of waiting until their margin increases. Because a variable or indexed contract usually requires much less forward commitment (if any) on the part of the supplier, you may be able to negotiate the ability to cancel the contract with 30 days notice, and thus, retain the ability to get several quotes from a variety of suppliers when trends seem favorable.
Blend and extend - Another way to take advantage of lower wholesale costs even if you have a fixed-price contract with some time left on it is to consider committing to an additional term in order to receive a lower rate for the balance of your current contract term. Downside: you will have to remain with your current supplier and your costs might be higher over time than they might otherwise have been.
Fixed/Variable combination - An interesting hybrid, this option includes a portion (usually half) of the energy supplied at a fixed price, and the remainder at a variable or indexed rate. The bill reflects the mixture of these two elements, with the end result being some protection from both volatility and high forward markets. Downside: conversely, you will also be exposed to some volatility and high-priced fixed costs.
Right to Serve - This is an option for the supplier to serve you at a specific price at a specific time in the future, but an obligation on your part to purchase if they choose to exercise it. This may help you take advantage of a backwardated market in the future as your current contracts expire. Downside: if markets go up the supplier may not wish to sell at the strike price; if they go down significantly, you will be stuck with a higher price than you might otherwise have had.
Market Watch - This is an obligation to contract with a supplier if they can provide energy at a specific price during a defined time period (typically 30 to 60 days). Downside: the supplier can choose to wait until they can add margin, and you have no guarantee of timing if current contract terms are ending.
EnergyWindow can help you sort out the various options available in the marketplace and develop strategies incorporating the right mix of products to meet your business objectives as well as support your entire energy procurement cycle. Call us at 877-444-0086 or visit us at www.energywindow.com for more information.
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