Index Pricing in Rising Markets
By Carol Anne Watts, Director of Energy Sales
Are you disappointed with renewal rates? If your energy contract is expiring in 2021/2022 you have likely been surprised with the rates being presented to you.
Since April 2021, future markets have been quickly increasing with little sign of relief in the near term, thus making most customers enter into agreements higher than their current price. What you may not know is that there are options other than buying a fixed price which may offer you more flexibility and a lower cost over time.
In 2020 we were presented with historic buying opportunities due to a mild winter in the Northeast and a suppressed economy due to COVID-19. For those unable to capitalize on that market opportunity and renew contracts in those remarkable lows, they may find themselves in a quickly rising market with little time to decide on the next electric/gas contract. If you find yourself amongst those disenchanted with renewal rates, we encourage you to entertain an index product.
Fixed rates calculate forward trading and commodity costs on the day a contract is executed. But markets can, and do, fall short of those calculations, leaving you paying an unnecessary risk premium. On an index agreement, you will pay actual closing costs of the commodity, without the risk premium of hedging into a future market. The tradeoff is price stability, which is often misinterpreted as risk. There are equal amounts of risk in a fixed and index agreement.
As every business will quantify risk differently, it is key to understand what is most important to your business – price certainty or cost over time. An index product cannot provide price certainty but will often outperform fixed rate contracts if markets do not perform as predicted on the day your business executes their commodity agreement. A fixed contract will provide budget certainty and price stability, but you are committing to future years of power supply and potentially missing other buying opportunities at lower rates.
An index, or monthly variable, product others clients more flexibility and reactivity than your standard fixed rate agreement. Many of these contracts carry a shorter- term commitment. (Pre-negotiated agreements through Freedom can be as short as a 30-day term). Shorter terms allow for more flexibility in your buying strategy and opportunities to react quickly if/when markets do fall.
As energy advisors, Freedom can set up agreements that will automatically execute when the markets reach your desired price. In other words, you manage your day-to-day operations of your business while knowing you won’t miss a good opportunity. The ability to react quickly and pivot is a major benefit to an index agreement in highly volatile markets.
The conversation around index agreements is one of risk tolerance. Is your business more aggressive or more conversative when it comes to taking on risk? Are your current options leaving you more apt to take on more risk than previous years? As your Energy Advisor, Freedom can explore these topics and present a solution, or mix of solutions, which satisfy your needs while minimizing risk and exposure.