For many years the energy market has largely been on a downward trend. Fixed energy contracts were the norm and finding year-over-year savings was easy. That changed coming out of the COVID pandemic when energy demand outpaced energy production and LNG exports reached new highs as Europeans sought new sources of energy at the onset of the Ukrainian/Russian war.
After falling to 20-year lows in 2020, energy prices surged to 14-year highs this summer and many companies are facing energy cost increases of 30% or more. To manage costs and navigate this high price environment, many are looking to managed energy supply contracts such as load-following block & index and fixed natural gas basis contracts. These products allow customers to fix portions of their energy needs and provide protection during peak demand months while also allowing for savings if the market falls.
Natural gas supply rates are comprised of two main components, the natural gas commodity or ‘NYMEX’ and the cost to delivery the commodity to your local utility or ‘basis’. Under a fixed contract structure, both the NYMEX and basis are locked for the full supply term.
Fixed Basis Contracts
To avoid locking in a high rate, customers may elect a Fixed Basis contract. With this type of agreement, the basis is locked while the NYMEX floats on the market. The NYMEX may be locked when the market is more favorable or may continue to float for the duration of the contract. Locks may be executed for individual months, seasonally, annually, in total, or in layers (25%, 75%, etc.) to remove market risk or take advantage of a price dip. This layering approach allows customers to average down their energy cost without making a long-term price commitment.
Block and Index Contracts
A managed approach to electric rates includes utilizing a block & index contract. Under a traditional block & index, the commodity floats on the market unless locked in an energy “block”. These blocks are highly structured, fixed volumes, set for all hours or on-peak/off-peak hours. This block type requires high visibility into hourly usage trends and clear usage forecasting.
Due to the complexity of the standard product, many customers are now using a load-following block & index where energy blocks are locked in layers (25%, 75%, etc.) that expand or contract with actual usage. This takes the guesswork out of properly quantifying fixed volume blocks. Load-following blocks can be locked for individual months, seasonally, or annually with the unlocked volumes defaulting to posted index or “LMP” rates.
Capacity/transmission, ancillary charges, and supplier fees may either be fixed as an energy “adder” to the block price or passed through at cost.
A managed energy product requires regular review of the energy market, an understanding of price fundamentals, and the ability to make quick decisions. Using an experienced energy consultant like Evolution Energy Partners can help you properly utilize these complex products to manage your energy budgets.