Positive Charges

Feb. 10, 2008
Understanding contract options can make your electric bills spark long-term savings.

Change has been said to be the only constant in life. But when it comes to purchasing electricity, the only constant seems to be volatility. Constellation NewEnergy offers a few quick pointers to determine which electricity contracts will help you make the best out of frequently unstable market conditions.

Evaluate your risk tolerance. The price of electricity can vary significantly, so determine what levels are acceptable for your facility. Index-based contracts mirror market conditions and tend to be more risky and vulnerable to price spikes. More conservative contracts include fixed prices that cap your rate.

Understand the role of market conditions. If you can tolerate price volatility, choose an index-based product. You pay higher prices when market conditions rise, but they go down when conditions improve. If you're more averse to risk, the decision is more difficult since most customers want to avoid buying when the market is high. However, customers should remember that fixed price contracts do not guarantee savings. They only provide price stability.

Consider "scaling-in." On a volume scale-in, the buyer (knowing their term of targeted supply) purchases a fixed-price that represents a percentage of their demand. For a term scale-in, a buyer purchases 100% of their demand at current market price for a portion of the desired term. The buyer then procures the remaining portion of the term at a lower market price in the future.

Examine other options. Index and fixed-price contracts are easy choices if the customer is either totally risk averse or completely willing to accept risk. Most customers, though, fall somewhere in between, so examine sophisticated electricity contracts that can hedge exposure to price volatility.

Take advantage of "market backwardation." A backward-dated market is one in which forward prices decrease with time. While near-term prices may be high, buyers can purchase longer term contracts to take advantage of lower future prices.

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