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Fixed Price versus Variable Price Energy Supply Contracts

When purchasing energy, there is a price/risk continuum between fixed price contracts and variable price contracts.

Fixed price contracts allow you to minimize your exposure to price risk by transferring this risk to a supplier.

With a variable price contract, you are accepting the risk associated with changes in the market price of electricity. This is not an insignificant risk as electricity prices are highly volatile. And, electricity price risk is asymmetric, meaning there is much greater potential for upward movement than there is for downward movement (prices are bound by zero on the downside but are not bound on the upside). With variable price contracts, suppliers transfer electricity price risk to you. In exchange, pricing to you should be at a discount.

Most variable price contracts will base changes in the contract price to changes in an index. Here in the Mid-Atlantic, the grid operator, PJM, tracks hourly prices by zone. These hourly prices are referred to as “LMP” which stands for “locational marginal price.” These LMP prices are a transparent index, meaning PJM makes them available.

Most suppliers who sell variable price contracts will price them as “LMP plus a fixed adder” and they will tell you their “adder”. LMP is passed through to you dollar-for-dollar and the “adder” is their margin on top of LMP. With the same LMP as a basis, you can then compare what “adders” different suppliers are offering. This approach is transparent.

Some suppliers who sell variable price contracts base their prices on indices that are proprietary and vague. There is no place you can go to see the index. Further, they often don’t disclose what their margin is on top of the index and they don’t commit to keeping the margin fixed. This allows them great flexibility in what they charge you each month. You are left vulnerable and there are no checks and balances.

If your are currently purchasing from a suppler under a variable price contract that does not have a transparent index and does not have a fixed “adder” we recommend that you review your contract and examine all of the suppliers monthly invoices to see if you have been getting the benefit of an “index” product.

Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096 or email us at jmcdonnell@avalonenergy.us

Copyright 2010 by Avalon Energy Services, LLC.

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Is There a Shortage of Energy?

I was recently asked to review a draft of a book in which there was reference to “…rising energy demand, global climate change and limited energy supplies…”  Are energy supplies limited?  The short answer is “no.”  There is no shortage of energy in the universe and energy supplies are not limited.  This is more than a technicality.  There may be a shortage of socially desirable energy supplies currently available, but as an absolute statement, there is no shortage of energy supplies.  The author of the book asked me to explain.  Here is my response: 

 

Concerning the needs of the human race, there is no shortage of energy in the universe and there never will be.  The amount of energy that exists is incomprehensibly beyond what we could ever use. 

 

Some forms of energy are currently more easily accessible and economical than others, such as coal, oil, natural gas, hydro and nuclear.  Other forms of energy are currently less accessible and economical, like solar, wind, ultra-deep geothermal, shale oil and tidal energy. 

 

While some forms of energy are currently easily accessible and economical, they may be less socially desirable.  Coal, for example, when combusted, emits soot, mercury and CO2.  Because of concerns over the impact of these emissions (along with other issues), coal has become less socially desirable.  Oil, natural gas, hydro and nuclear each have their own set of trade-offs, some of which are more socially undesirable than others.  We are learning some of the socially undesirable second order implications of wind energy, like bird kills, intermittency, energy sprawl and its negative impact on landscape aesthetics. 

 

So, there is no shortage of energy available.  Each form of energy comes with trade-offs and has its own balance sheet of socially desirable and undesirable attributes.  How we rate the trade-offs changes over time.  But at any point in time, some forms of energy are more or less socially desirable than others. 

 

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096 or email us at jmcdonnell@avalonenergy.us.    

 

Copyright 2010 by Avalon Energy Services, LLC.