Selecting The Right Energy Procurement Contract

Posted on April 8th, 2011 by

If you are uneducated about how energy procurement contracts work, then this article is for you. Typically energy providers will offer customers a term contract. It is important to select a term that provides you the best opportunity to take advantage of any dips or rises in the markets. For example, it might be in your best interest to not sign a long term pricing contract if you think that energy prices are going to drop soon. Conversely, you should sign a long term agreement if you think that prices will soon rise. In many cases, customers will sign contracts, in 1-5 year terms, so that they can provide their companies with some flexibility while also helping their business plan for a cost that they can fix.

As you are settling on the right term you will also need to consider how your energy will be priced. There are three common options; a fixed rate, variable rate and a heat rate. Each option comes with a certain amount of risk. A fixed rate is having your energy costs fixed and nothing moves except for your lines and wires costs.

A variable rate means that the price of your power will change during the term of your contract. The rate will typically be based on what real time energy prices are and will change as the market changes. This allows you to take maximum advantage of times when prices are low. You can also get burned if prices quickly rise.

A heat rate product is a type of a variable rate that allows you ride the natural gas market based on a special formula. There are only certain states that offer heat rates because some states rely on more natural gas generation than others. The nice option about heat rates is that, in many cases, you will be able to lock in prices for different times and partial loads of your contract. So, for example, you can lock in the first six months and then float the backend of the contract. There are numerous alternatives to this example that can also potentially fit your business’s needs.

It is extremely important that you understand current market conditions before you sign a procurement contract with an energy supplier. You could be leaving a lot of money and savings on the table.

Written by Josh Stern, President of JASMAHN Consulting.

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