Fixed, index, or something between

Every commercial supply contract in Texas is a decision about who carries price risk. Fixed products move it to the supplier, who charges for taking it. Index products keep it with you, which is cheaper on average and occasionally very expensive.

Fixed rate

One energy rate for the term, typically twelve to sixty months. Your bill still moves with usage and with regulated delivery charges, but the supply component is locked.

The supplier is taking on the risk that wholesale prices rise, and prices that risk into your rate. So a fixed rate is, on average and over time, somewhat more expensive than floating. What you are buying is not a low price; it is a known one. For most businesses that is the correct purchase, because the cost of an unbudgeted month is greater than the value of an average saving.

Fixed suits: businesses with tight margins, seasonal cash flow, or nobody whose job is watching energy markets. Which is most businesses.

Index

Your price follows a published index — often a natural gas benchmark or an ERCOT settlement price — by a stated formula, plus the supplier's adder. When the market falls you benefit immediately. When it rises, so does your bill, in the same month.

Index products are legitimate and, over long periods, frequently cheaper. They demand three things: the balance sheet to absorb a bad month, somebody paying attention, and the willingness to act when the market moves. Missing any of the three turns a considered strategy into accidental exposure.

February 2021 is the reference point. ERCOT settlement prices sat at the market cap for days, and businesses on pass-through index products received bills that dwarfed their annual energy budget. That was an extreme event, and extreme events are precisely what an unhedged position is exposed to.

Index suits: larger operations with financial tolerance, an active view on the market, and someone accountable for it.

Block-and-index

A hybrid. You fix blocks of your expected volume — say, your base load — and leave the balance floating. The fixed portion gives budget certainty for the consumption you cannot avoid; the floating portion captures market falls on the marginal volume.

It works well for businesses large enough that the decision merits attention and structured enough to make it. It works badly as a compromise chosen to avoid deciding, because somebody still has to decide when to lock each block, and "nobody got round to it" is how the floating portion ends up being all of it during a price spike.

What actually decides it

Four questions, in order:

• Could you absorb a month at three times budget without disruption? If no, fix. That answer alone settles it for most businesses.
• Is anyone accountable for watching the market? Not "could someone" — is someone. If no, fix.
• How predictable is your volume? A business whose usage is growing or seasonal has to think about the tolerance band on a fixed contract, which can complicate the simple answer.
• What is your risk appetite as a business, honestly? Not what it is in a good year.

The terms that matter as much as the structure

Whichever structure you pick, the contract terms decide how it behaves at the edges: the volume tolerance band, which charges are fixed and which are passed through, the early termination calculation, and what happens automatically at the end of the term. A fixed rate with a narrow tolerance band is not as fixed as it sounds if your usage is moving.

We read those terms before recommending anything, and we will tell you when a lower headline rate is attached to terms that make it worse than the alternative.