Beyond the basic fixed vs. index pricing choice, commercial energy buyers have a variety of contract structures available in deregulated markets. Suppliers often offer different contract types that allocate risk and cost responsibilities in different ways. Understanding these options will help you select a deal that aligns with your objectives – whether you prioritize simplicity, cost savings, or flexibility. Let’s look at some common contract types:
- Fixed All-In Contract: This is the simplest form – you pay one all-inclusive fixed rate per kWh that covers virtually all components (energy, capacity, transmission, etc.). It’s like a bundled package. The supplier takes on the risk of fluctuations in those components over the term. The upside is maximum budget certainty (no surprises, as long as your usage is as expected) and ease of understanding. Many small businesses prefer this “set it and forget it” style. The downside: it can include a premium because the supplier builds in a cushion for potential increases in costs like capacity or regulatory changes. You might pay a bit more if those costs would have actually gone down. Always clarify what “all-in” means – ideally it includes everything except taxes. Ask if there are any carve-outs (e.g. some contracts exclude brand-new charges like a future carbon tax or have clauses for extreme events). If truly all-inclusive, you have locked in your full $/kWh cost. This contract is best for risk-averse buyers who want simplicity and stability and are willing to possibly pay extra for that insurance.
- Fixed Energy with Pass-Through (Partial Fixed): In this structure, the supplier fixes the price for the energy portion of your cost, but certain other charges are passed through to you at cost. Commonly passed items include capacity charges, transmission costs, and possibly ancillary services or line losses. Why do this? Because if you believe some of those costs are overstated in fixed deals or you can manage them, you avoid paying the supplier’s risk premium on them. For example, capacity costs might be moderate now and you expect them to stay flat; by taking capacity as a pass-through, if they indeed stay flat (or drop), you benefit by not having locked in an inflated estimate. Of course, if those costs rise, you will pay the higher amount. Essentially, you’re taking on risk for those components. The advantage is usually a lower initial energy rate compared to an all-in contract, and transparency – you see actual costs for those line items and can act to mitigate them (like doing demand response to reduce your capacity tag, thereby lowering what you pay, which you wouldn’t directly benefit from in an all-fixed contract since you’re paying a fixed number regardless). This kind of contract is popular with larger savvy customers who actively manage their load or have insight into those cost drivers. It’s a moderate risk-middle ground between all-in fixed and full floating.
- Block & Index Contract: This is a hybrid model where you purchase a certain fixed block of power at a fixed rate, and the rest of your usage is settled at index rates. For instance, you might fix 50% of your peak hours usage at $X and let the other 50% float at market price, or fix a flat block like 5 MW around the clock and index the remainder. This can be customized to your load profile. The idea is to hedge your core usage while retaining flexibility on the margins. It’s useful if you have a consistent base load that you want to secure at a known price, but variable additional usage that you’re okay exposing to the market (or able to curtail if prices spike). With block & index, timing matters: you’ll want to lock blocks when forward prices are favorable. Some buyers layer in blocks over time (a form of layered hedging). The complexity is a bit higher – you’ll need to manage and understand two pricing streams on your bill – but it can yield a good balance of cost and risk mitigation. Many suppliers offer standard block products (e.g. on-peak block, off-peak block, seasonal blocks, etc.).
- Index with Collars or Caps: If you lean toward index but fear extreme spikes, some contracts let you set a cap (price ceiling) or a collar (a band within which your price will stay). For example, index pricing but if the market goes above 15¢/kWh, you pay no more than 15 (the supplier basically provides insurance beyond that point). In exchange, you might pay a fee or give up some savings above a lower threshold (that’s a collar: cap and floor). These can be useful to manage worst-case scenarios while still mostly tracking the market. Not all suppliers offer this, and it can be pricier because the supplier might hedge on your behalf to insure that cap.
- Flexible Volume Contracts: A few suppliers have products for businesses with highly unpredictable usage, where you’re not heavily penalized for volume changes. They might allow re-rating periodically or have wider bandwidth (like ±50% usage allowance). Usually, these come at a cost (higher margin) or are handled via index pricing on the excess usage, but it’s something to inquire about if your consumption could drastically change (for instance, if you might add a new facility mid-term or have intermittent operations).
- Customized or Structured Products (for large buyers): Big energy users sometimes strike bespoke agreements. Examples include block forward agreements directly on the wholesale market (with a scheduler managing it), or synthetic PPAs (financial agreements for energy tied to a project – overlaps with our Sustainability page), or multi-party aggregation deals. These are advanced and typically involve consultants or sophisticated in-house energy procurement teams. The takeaway for most readers: know that if your needs aren’t met by standard offers, there are creative solutions out there, but weigh complexity versus benefit.
How to decide? It comes down to how much risk you want to take versus pay a premium to avoid, and how much complexity you’re willing to manage. Here are a few guiding thoughts:
- If you have no time or expertise to actively manage energy and just want predictability, a Fixed All-In is likely your best bet. You’ll know your rate and can move on with life (just remember to re-shop when the term is nearing its end!).
- If you are budget-conscious and somewhat risk-tolerant, consider a Fixed Energy/Pass-Through or Block approach. These can lower your expected costs, but you should be prepared to respond or at least tolerate if those pass-through elements rise. For example, if you take capacity pass-through, put effort into understanding and reducing your peak demand – that will directly pay off.
- If you have strong knowledge or guidance (maybe via a broker or consultant) and want to try beating the market, block & index or pure index with some hedging tools might work well. Just ensure stakeholders (CFO, etc.) are aware of the potential swings.
- Diversify: If you operate multiple facilities or have very large usage, you don’t have to do the same thing for all of it. Some companies mix contract types – e.g., fixed for East Coast sites, index for Texas site, depending on market conditions and organizational comfort.
Finally, always get the details from suppliers on how each option will appear on your bill. For instance, in a pass-through contract, know how they calculate capacity charges and whether they use your exact tag or some gross-up. In block contracts, know how any difference between block and actual usage is settled (usually at index). Transparency is key – the more you know upfront, the fewer surprises later.
(Now that you understand contract types, you’re better equipped to design a purchasing strategy. To guard against the inherent risks in the market (like price spikes or changes in those pass-through costs), read Managing Risk in Energy Purchasing next. And if these options feel overwhelming, our Energy Brokers page explains how outside experts can assist in structuring deals.)