The energy markets, particularly oil, have been devastated by COVID-19’s impact on consumer and industrial demand. Because slumping natural gas prices had already depressed electric prices prior to the pandemic, recent demand erosion on the power grids has brought real-time prices to record lows.
Normally, this would be considered good news for consumers, who could take the opportunity to lock in low prices with long-term energy purchases. But with many end users facing lower demand for their own products and services, they may hesitate at making any long-term commitments.
Hesitation due to long-term uncertainty is understandable and in many cases appropriate. But the time is now to take advantage of lower market prices, even if only for short-term purchases.
If you are looking to contract for a period covering 2021, there are a number of strategies and contract structures that allow you to capture some benefit from today’s low energy prices without overcommitting in the face of unknown changes in demand.
To Minimize Capacity Charges: Consider Pass-Through Products
Capacity can account for 25% or more of a customer’s supply contract. Many RTOs allocate these costs to electricity consumers based on their contribution to the grid’s peak demand the summer before. For many customers, this means that their electricity demand this summer will have a significant impact on their supply costs next year.
If your company expects lower than normal electricity demand this summer, it is likely that your capacity costs will decline next year because your contribution to the grid’s 2020 peak demand will be lower. In order to realize the benefits of reduced demand this summer, consider a capacity pass-through product for any new contracts that will flow in 2021.
Typically customers sign capacity pass-through contracts to realize savings associated with active peak demand management or to avoid slight premiums attributed to fixed, all-in products; however, this contract structure also presents a unique opportunity for companies facing reduced demand for their products or services this summer. The potential savings could be significant, with capacity prices often ranging between $50,000 - $100,000/MW-year, depending on the RTO and load zone. In NYISO and Ontario, they are even higher.
To Minimize Use Charges: Consider Block & Index or 100% Bandwidth
If you expect energy consumption will drop off over the next year, you may want to opt for a flexible contract or a 100% bandwidth contract to account for the potential change.
Block and Index contract: In a block and index contract, your site locks in a price for a certain quantity of power that you expect to be less than your total use. The remaining quantity can either be locked in at a later date as forecasts change, or billed on the hourly index for incremental volumes. This contract structure is popular for its flexibility, and among customers who want to minimize market timing risk by spreading out their energy purchases or who want to take a measured amount of index exposure to avoid the premium typically associated with fixed-all in products. Savings are not guaranteed year-to-year, but are often well documented over the long-term.
100% Bandwidth contract: Under this contract provision, the customer has a constant price per unit, regardless of any future deviations in energy usage. Customers pay a premium for the supplier to assume the risk of any significant load fluctuations, and in return the customer secures budget certainty. This structure is popular with customers who want to protect their budget from unforeseen changes in load and/or need visibility and certainty into future energy spend.
Customers should consult with their Enel X Advisor to discuss the impacts of potential load fluctuations and develop a purchasing strategy that accounts for these possibilities. Enel X will ensure that accounts are placed into a contract structure that balances the risk of future load fluctuations with the positive cost impacts of current low energy prices.