Fixed vs indexed business power contracts

What each structure does with market risk

A fixed offer is a hedge the supplier sells you. The supplier takes the wholesale position for the term and builds the cost of that position, plus its margin, into a single price per unit. An indexed offer reverses the arrangement: the supplier is paid for arranging supply and passing a wholesale price through, and you carry the movement. That reads like a clean either/or, but the two contracts share most of their contents. Neither changes the regulated delivery half of the bill, neither fixes how much you consume, and neither removes the demand charge your own peak sets. The comparison is about one line of the invoice, and about which risks stay with you whichever structure you sign.

• Fixed: the supplier prices the hedge and holds market risk for the term.
• Indexed: you hold the market risk and the supplier charges an agreed margin.
• Both leave delivery, consumption and demand risk exactly where they were.
• Only the supply line on the bill moves between the two structures.

The reference is the product, so read the formula

An indexed contract is a formula, and the formula decides everything. It has to name the reference, and in North American wholesale power the named references are specific delivery points rather than an abstract market price. The Energy Information Administration republishes traded price data for seven major hubs: Mass Hub in New England, PJM West, Indiana Hub in the Midwest, ERCOT North in Texas, Mid-C in the Pacific Northwest, NP-15 in Northern California and Palo Verde in the Southwest. A published series sits behind each, so the reference can be checked. Two offers can both call themselves indexed and still reference different hubs, or the same hub in a different market: the day-ahead market prices power before delivery, the real-time market clears close to it, and a contract following one behaves differently from one following the other.

• The formula must name the hub or zone, the market and the averaging window.
• EIA republishes traded prices for seven major hubs, so the reference is checkable.
• Day-ahead and real-time references are different products, not synonyms.
• An offer that will not put the reference in writing cannot be compared.

Capacity is bought years ahead in PJM and ISO New England

In PJM and ISO New England a large part of the supply cost is bought years before you consume it, and the purchase is public. PJM runs its Reliability Pricing Model through a Base Residual Auction held three years before the delivery year, clearing capacity against a forecast reliability requirement. ISO New England holds a Forward Capacity Auction annually, three years before a commitment period that runs from the first of June to the end of the following May. Both publish results by delivery year, and both quote the clearing price in their own unit: PJM per megawatt-day, ISO New England per kilowatt-month. A fixed offer has usually priced the supplier's own position in that auction into the number you are quoted.

• PJM's Base Residual Auction is held three years before the delivery year.
• ISO New England's Forward Capacity Auction runs annually, three years ahead.
• ISO New England commits capacity from June to the end of the following May.
• A fixed price has usually absorbed that capacity position already.

ERCOT is energy-only, so there is no capacity line to pass through

ERCOT, which covers most of Texas, does not run a central capacity auction at all. It is an energy-only market: generators are paid for the energy they produce and for ancillary services, not through a separate capacity payment for being available. That changes what a contract has to cover. An ERCOT fixed price does not recover a three-years-forward capacity product for each customer's load, because there is no central clearing price to recover; it prices expected energy, scarcity, congestion, shape and volume risk instead. An ERCOT indexed contract normally references an energy market, often a settlement point price or load zone, plus an adder. The absence of a capacity line is not the absence of reliability cost: in a tight system it arrives through energy and ancillary prices rather than a separate charge.

• ERCOT is energy-only; there is no central capacity auction or obligation.
• Reliability cost arrives through energy and ancillary prices, not a capacity line.
• An ERCOT indexed contract usually references a settlement point price or zone.
• Where PJM or ISO New England passes capacity through, ask; in ERCOT there is none.

Texas defines these products, and bars one for small accounts

Texas names these products by rule, and the names carry obligations. Under 16 TAC §25.475, a fixed rate product is one with a term of at least three months whose price, including recurring and ancillary charges, is the same in every billing period, and which may vary from the disclosed figure only for actual transmission and distribution charge changes, ERCOT administrative fees, or costs imposed by law. An indexed product is one whose price may vary under a pre-defined pricing formula based on publicly available indices disclosed to the customer, and it may run three months or more, or month to month. A wholesale indexed product is defined more narrowly, as one whose price includes a direct pass-through of real-time settlement point prices in the ERCOT region. A provider, aggregator or broker may not offer an indexed product to a residential or small commercial customer, nor a wholesale indexed product to those customers.

• Fixed rate product: a term of at least three months, price constant each billing period — §25.475(b)(5).
• Indexed product: price varies under a pre-defined formula on disclosed public indices — §25.475(b)(6).
• Wholesale indexed product: a direct pass-through of real-time ERCOT settlement point prices — §25.475(b)(12).
• Offering an indexed product to a residential or small commercial customer is barred.

Delivery and transmission sit outside both structures

Whatever the supply formula says, the delivery half of the bill arrives under a regulated tariff, and the tariff can put transmission on your invoice as a charge in its own right. A Pennsylvania tariff, for instance, defines a Non-Market Based Services Transmission Charge for PJM regional transmission costs, with the local distribution charges set out separately in the same schedule. That is the shape to expect across restructured markets: the supply line responds to the contract you sign, while transmission, distribution, metering and the programme riders attach to the address by tariff. Moving between fixed and indexed never touches those lines, and an offer quoted as a whole-bill figure describes something wider than the supply product it sells.

• Delivery and transmission arrive under a utility tariff, not the supply contract.
• Transmission can arrive as a separate named charge under the tariff.
• Programme riders attach to the tariff and ignore the supply structure.
• Ask a supplier quoting a total bill to separate the part it actually supplies.

Convert both offers to an effective price on your own data

A fixed price and an index cannot be compared as two numbers, because one is a commitment and the other is a rule applied to a market that has not happened yet. The workable method holds your own twelve months of consumption and demand constant and runs both contracts through it. The fixed offer is arithmetic: one unit price against your units, plus whatever the contract adds on top. The indexed offer means replaying its formula over the published reference prices for the same twelve months, which shows what the arrangement would have cost in a year whose answer is already known. Where capacity is passed through, it enters as its own term — a capacity obligation in kilowatts, multiplied by the applicable capacity price and the months, divided by the forecast energy in kilowatt-hours. Test at least a full year, and a second where the history exists.

• Apply both contracts to the same twelve months of your own usage.
• Replay an indexed formula against published historical references.
• Where capacity is passed through, add it as its own term rather than assuming it is inside the adder.
• Compare an effective price per unit, never two headline prices.

What your own load and your term length decide

Two features of your site matter more than any forecast. The first is how steady the load is: a constant draw and a spiky one can sign the same contract and end up with very different bills, because the peak sets part of the charge under either structure. The second is the term. A longer term freezes the supplier's position for longer and generally costs more for the certainty it buys, while a shorter term returns you to the market sooner — useful if you expect to expand, add equipment or move, and also the lever a business uses to shift a renewal date out of a season it would rather not price in. Assemble twelve months of consumption and demand by month, the meter and service address with the delivery utility named, and the current contract's end date and notice requirement before you ask for either price.

• Load shape decides how exposed you are under either structure.
• Longer terms cost more and freeze the supplier's position for longer.
• Shorter terms return you to market sooner and move the renewal calendar.
• Bring usage by month, meter details, the end date and the notice period.

Eligibility and what an inquiry does

Whether a business can buy either structure depends on the service address, the meter and the utility territory serving it. Municipal utilities, cooperatives and some jurisdictions have no competitive choice at all, and the rule text described here is Texas-specific; other markets define their own products and disclosure duties. HighGround may receive compensation from a provider on a completed purchase, and an inquiry places no order and switches no supplier — it starts a comparison against your own usage and terms.

• Choice depends on the address, the meter and the utility territory.
• Municipal systems, cooperatives and some states have no retail choice.
• An inquiry places no order and switches nothing.
• The rule text cited here is Texas-specific.

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