FIXED RATE PURCHASE STRATEGY
There are numerous ways to buy electricity. Based on the market, your risk tolerance, your facility’s usage patterns, size and specific business goals, we’ll work with you to design a purchasing strategy that will allow your business to take full advantage of the deregulated electricity markets.
In instances where electricity prices are on the climb, a fixed-rate strategy is ideal. Although it can never be certain if the electricity markets will rise or fall, there are certain instances when historical trends, oil and natural gas pricing along with other market indicators can signal future prices with a higher degree of probability. If electricity prices continue to rise, the sooner you fix your price the more savings you will recognize.
Your utility’s basic service is determined by short term fixed positions set at particular times during the year (often quarterly or bi-annually depending on the utility and the class of service). In a market that has experienced a fall in prices, or when market indications suggest a growing probability of higher future prices, a fixed price can lead to a lower overall cost as all components of your rate are fixed and held for a period of time, while a floating rate would continue to increase. Additionally, fixed prices help mitigate the market risk for facilities in which ancillary charges (capacity, line-loss etc.) are less desirable per kWh, risking higher prices during certain times of the year. For these reasons, a fixed-rate plan is ideal for for use in a rising electricity market, or when business goals make a variable plan less desirable.
COMBINATION VARIABLE AND FIXED RATE STRATEGY
Variable-rate plans can feature a hybrid of both floating and fixed rates.This strategy constrains a portion of your rate with a fixed price, while allowing the remaining portion of your price to float with the market. The fixed portion of the rate is called a “fixed adder”. By allowing a portion of your rate to float with the market, your facility can benefit if the market rates for electricity stays low or falls lower, and your off-peak power can be purchased at a time of day where less power is in demand, potentially reducing its price. However, by also allowing a portion of your rate to be fixed, your facility can limit the upside market risk that is a consideration with other, fully floating rate plans. This strategy is best used by facilities with some off-peak power use, or when the probabilities of future market direction are less certain for the management team.
VARIABLE RATE STRATEGY
In instances where a decline in electricity prices seems more certain, or if there is substantial “off peak” usage, a fully variable-rate plan can be a great option. A fully variable rate plan allows customers to purchase their electricity directly from the Power Pool similar to the way wholesale suppliers do. Electricity is priced hourly throughout the day. The price is largely dependent upon demand. Since most business demand electricity from the grid during “peak” times, power is typically more expensive during those hours. During “off peak” hours, the price is typically lower. As a result, businesses using “off peak” power more often than the average user should benefit from these lower prices, as the utility offers only one price for a 24 hour day based on their entire customer profile.
In addition, Basic Service in many states is determined by short term fixed positions set at particular times during the year depending on class of service. In a declining market, a fixed price can lead to a higher overall cost than a floating price as the price is fixed & held for a period of time while the floating price continues to fall. For that reason, a variable-rate plan is ideal for a falling electricity market environment.
HYBRID AGGREGATION STRATEGY
A Hybrid Aggregation Plan is designed to take advantage of the pricing advantages associated with large blocks of power and the timing of these blocks to be priced in the spring & fall “shoulder months”. Using this energy strategy, you will your usage volume will combine with others in the same region using this strategy and you will receive market pricing until the next “fixing point”. As we approach the shoulder seasons of spring or fall, the entire group will be priced and each customer will be offered the fixed discounted rate. We will not know what the fixed rate will be as we enroll new customers into the this strategy, so each customer will have the ability to ”opt out” of the group fixed price for any reason and remain on our market variable rate plan, or if they choose, pursue their own fixed price through one of our fixed-rate strategies.
Historically the purchase of fixed priced electricity contracts has best been completed in the fall & spring months, or during the “shoulder season”. This is mostly because these shoulder months are influenced by neither the high power consumptions associated with the summer cooling season nor the winter heating demand which historically puts pressure on the natural gas markets that, in turn, influence electricity costs. These months, typically March and October, are the times we generally recommend fixing-in electricity prices. Over time this strategy has consistently proven that the purchasing of large aggregated blocks of power during shoulder-months results in better pricing for our customers.
QUARTERLY HEDGING PLAN (Laddered Approach)
Electricity, as a commodity, behaves similarly to a stock. As an equity investor the concepts of dollar cost averaging and diversification are commonplace, yet we seldom see the same strategic approach applied to energy costs. This is mostly due to the smaller user’s inability to purchase power on the exchanges. Our relationship with Patriot Energy, one of New England’s largest licensed electricity suppliers and aggregators, brings this capability to smaller users through a quarterly hedging strategy.
Quarterly Hedging is a methodical electricity purchasing strategy designed to offset the volatility associated with a utility’s basic service variable cost. This is accomplished by introducing short term fixed priced contracts into a comprehensive buying strategy. On a quarterly basis, a 12 month fixed price is secured for 25% of our aggregated load from all users in the plan. This physical hedge acts as a stabilizer, offsetting spikes in the power market without exposing 100% of the load in a fixed price that could end up above market. This strategy insures that our customers receive a more stable price over time while mitigating the risk associated with traditional fixed and floating price offerings.
Since natural gas represents a primary fuel used for the generation of electricity, the rising cost of Natural Gas will usually trigger a corresponding increase in electricity prices. To help alleviate these seasonal spikes, a seasonal heeding plan is designed to protect from the traditional summer and winter spikes by purchasing summer peak power in the spring (before cooling pressure pushes up demand) and winter peak power in the fall (before heating demand puts pressure on natural gas).
Historically the utility’s Basic Service prices have risen in the summer and winter months. This is primarily attributed to the increased demand for electricity as a result of summer cooling needs and the rise in natural gas prices as heating demand typically consumes gas reserves. Further, wholesale power spikes have historically been associated with peak power (Weekdays 8AM-10PM), during summer and winter seasons. Because of this, our seasonal hedging plan uses fixed pricing during periods of peak power in the summer and winter months. This strategy significantly mitigates the risk of peak power spikes, while allowing the floating off peak position to fall in low demand situations (i.e. a cooler summer or warmer winter).
In many states, Basic Service is secured for industrial customers on a quarterly basis. Every three months the utilities solicit bids form Competitive Suppliers to service the Basic Service load for the next three months. This bidding process ends approximately 45 days before the first month of service is to begin and presented to the state regulators for approval no later than thirty days before day one of the first month. The day in which the bid is secured is arbitrary-meaning there is no consideration where the market is trading when the rate is quoted. Our Quarterly Purchasing Plan mimics the process by which Basic Service is secured with two significant differences: we are able to develop our load to maximize cost reduction and we can choose the most opportune time to secure pricing within the 45 days prior to commencement of the new Basic Service rates.
We develop our load in two basic ways. First we only introduce the most credit worthy customers into the plan, reducing bad debt premiums placed on a load representing an entire utilities customer base. Second, we purchase wholesale blocks of power at discounted rates, a benefit not readily available to smaller usage customers. As a large purchasing entity in the market, Patriot Energy brings the benefits of wholesale purchasing to facilities enrolled in this plan – a benefit usually reserved for the large power user.
MANAGED PORTFOLIO SERVICES
Our managed portfolio service is a comprehensive managed electricity portfolio consisting of interval-metered customers participating in the New England-ISO market. Similar to a managed equity mutual fund, our portfolio administrators actively manage the Philadelphia portfolio by positioning portions of the load in fixed priced financial hedges. The goal of the plan is to consistently produce a lower overall cost to the individual accounts or aggregated group when compared to the utility’s Basic Service.