Imagine that energy prices have dropped, and it seems that forward prices are at an all-time low. It looks like a great opportunity to save by locking in a fixed rate. After all, prices can’t go lower, right?

 

Actually, history has proven that assumption wrong.

Choosing a fixed rate to cover your whole load may be the easiest strategy, yielding considerable savings and budget certainty. But for medium and large energy consumers, locking in your entire price, even when the market is good, may also leave value on the table.

 

Market Changes Aren’t Always Predictable

Many factors can cause prices to fluctuate, and expectations or predictions don’t always prove to be accurate.

In October 2015, Texas electricity prices dropped to an all-time low. Excited by the opportunity of a great deal, a facilities manager locked in their organization's entire power load for December and January. But then, prices dipped even lower, offering on-peak savings of $6.26 per megawatt hour. Because the facilities manager had already locked in 100 percent of the load, the organization ultimately paid 24 percent more than the index price.

A fixed rate may look like an easy win, but the simplicity of the solution may also cause you to pay a great deal more than necessary by missing out on additional price dips or low index prices.

On the flip side, floating your entire load on an index price can be risky, too.

Remember what happened in July 2019 in Texas’s ERCOT market? Low reserve margins combined with sustained heat and low wind generation caused real-time prices to reach $9,000 per MWh for several hours and to average more than $160 per megawatt hour for the full month. Forward prices shot upward in reaction to the index price spikes. As a result, it was neither the right moment to be on a fully market-based rate or to quickly shift to a fixed rate.

So how can you get the benefits of a low market price, while also protecting your budget from unexpected spikes?

 

Choose a Flexible, Customized Price

To optimize both your energy budget and your opportunity in the market, a layered procurement solution offers the best of both worlds. This combination fixed and market-based purchasing strategy can even save you money in a low-priced market.

With a layered energy procurement solution, you can purchase part of your load at a fixed rate. This fixed portion is often referred to as a layer or hedge. The remaining load stays at a market-based rate until you decide to "layer in" another hedge at a fixed rate.

Some consumers incorrectly believe that they cannot achieve price certainty with a layered energy solution. But our energy strategists can help you design a procurement plan for price certainty over time, while balancing risk and reward in the market. You can purchase hedges for months or years out in the forward market or keep part of the load in the index market.

 


"The beauty of layered procurement is that customers can create custom layers that are appropriate for the unique needs of their organization's energy usage and risk philosophy," says Hans Rottmann, Regional Manager of Strategic Sales Origination at Direct Energy Business. "Customers can lock in a percentage of their load without immediately fixing the entire amount – and that leaves them open to catch great market prices or change their strategy if better opportunities develop later."


 

The Opportunity of Layered Procurement

Layering your energy purchases allows you to reduce exposure to market volatility without fixing your entire load. The cost-saving potential makes the solution appealing to medium and large organizations. But is layered procurement necessary when energy prices are already low?

Both layered and fixed rate energy procurement are effective at avoiding unfavorable market prices; but only layered purchasing provides the flexibility to continue benefiting from falling prices. If your purchasing goal is simply to meet your budget, a fixed price solution can help you, as long as the market is favorable. However, if you want to beat your budget and reduce your energy costs, a layered price gives you a variety of options under any market condition.

 

Load Following Block and Index

For example, our Load Following Block and Index solution offers customers a combination of budget stability and purchasing flexibility. You can lock in a percentage of your power usage (up to 100 percent) and purchase the remaining load at index-based prices.

 


"Hedging everything as a 100 percent fixed price might be safe, but a knee-jerk reaction to forward pricing is generally not the answer," says Rottmann. "With a layered, customized strategy and market monitoring from our energy strategists, we can help customers save."


 

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