Selecting the Right Strategy for Your Organization
by Pete Lawlor
When it comes to purchasing electricity or natural gas, there’s no one-size-fits-all approach. Selecting a product or strategy should be based on your organization’s goals, risk tolerance and current market conditions. Let’s look at three different approaches and the conditions under which they make sense.
“Fully-Fixed” or “Fixed-all-in”: refers to buying 100% of your electricity/natural gas supply at a fixed rate. This approach inherently involves the least amount of market risk for the consumer and the most for the energy supplier. As a result, the consumer pays a premium to lock in the price. It makes sense for risk-averse organizations, when commodity pricing is expected to move higher, or if the organization is seeking budget certainty.
“Block & Index” or “Hedging”: refers to buying a portion of your energy supply at a fixed rate and letting the remaining usage “float” with market pricing. This approach falls in the middle of the risk spectrum, exposing the consumer to more market risk than a fully fixed product and less market risk than a full index/variable rate. It also falls in the middle from a cost/price premium standpoint as the energy supplier takes less market risk. As a strategy, it requires the most analysis to implement properly. It makes sense for organizations that want to be strategic and for the avoidance of seasonal market risks.
“Index”/”Variable”/”Full Pass-Thru”: refers to allowing 100% of your energy supply to “float” with the market price. This approach involves the most market risk for the consumer and the least for the energy supplier. With little-to-no premium included by the supplier, this strategy most often yields the lowest pricing over the long-term. It makes sense for organizations with high-risk tolerance/budget flexibility, areas with minor market volatility and when commodity pricing is expected to move lower.
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