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Over the last few years, many energy consumers have implemented flexible energy procurement strategies. While flexible procurement strategies have been employed in the natural gas market for many years, the concept is less developed in the electricity market. Now, electricity suppliers are introducing these products in markets where there are Regional Transmission Organizations (RTOs). These RTOs (PJM, MISO, NE-ISO, NY-ISO) provide the transparent spot pricing that is needed for liquid forward markets, which makes flexible procurement a reality for both the suppliers and customers.
Fixed priced procurement for both natural gas and electricity provides price certainty for the time period the contract is signed for. The attractiveness of this is the elimination of most price risk. However, there is only a small chance of procuring the lowest possible price on the day that a customer signs a contract. Further, when a customer is ending a contract, they may be forced to accept a high price just because their contract is ending. Flexible purchasing provides a possible solution to these two issues, though it must be stated that flexible procurement introduces price and volume risk for customers, and this needs to be clearly understood by customers entering into such contracts. We will endeavor to explain some of the important facts and tools needed to do flexible electricity procurement.
For Alfa Energy, the most important item needed to properly evaluate a flexible procurement contract are both load (usage) data and price data. Granular (hourly) usage data is essential for each individual account as well as total data for a customer’s aggregate load. For larger customers, it is very important that a customer understands their usage pattern so that they may structure a flexible contract that will minimize their risk and maximize potential gains from lower prices. For smaller customers (under 1M kWhs per Annum), monthly usage data may suffice.
The objective of flexible purchasing is to spread out purchases over time to achieve a lower cost, which could involve buying separate blocks of power after signing a contract but before the effective date. It could also mean that the customer decides to receive spot index pricing. There is also the possibility that the customer could implement a hybrid approach where they receive fixed prices for a certain portion of their load and receive index prices for the remaining amount. From an energy economics theory viewpoint, spot pricing should be cheaper than forward pricing because an event risk premium is typically built into forward prices and there is a convergence towards lower spot prices closer to delivery. Usually does not mean always and that is the trade-off.
