ERCOT - Block and Index Strategy Has Benefits For Customers

By Cindy Wishert, Market Manager - ERCOT, GDF SUEZ Energy Resources NA

There are multiple ways to manage the price paid for energy across months, seasons or years.  For companies willing to shoulder a certain amount of risk but having concerns about allowing 100 percent of their energy price to ride on an index, a block and index combination is a good option.

The block and index strategy allows the customer to hedge all or part of their energy consumption without having to pay the premiums embedded in fixed pricing for hourly shape and load following.  Block and index is a popular strategy in times where energy prices are lower, since it is a flexible option to fix a portion of the energy consumed while allowing a portion to take advantage of market dips.

If your usage is predictable for a period of time, whether that is monthly or seasonal, purchasing a portion/block of your usage for a pre-defined time period allows you to lock in a price for a portion of your energy. The remainder of the usage will be purchased at an index or market clearing price.

Businesses that choose this approach maintain a hedge against volatile price swings for a portion of their usage, offering savings against a set fixed price.  Accepting some risk of purchasing power in the real time or day ahead markets can open the door to take advantage of downward price swings while protecting a portion of the load from price spikes.

Blocks come in various sizes and types.

In a Round The Clock (RTC) block, a set quantity of power is purchased at a set price for every hour of the day.  This works well for a continuous process that runs 24/7.

Businesses that actively manage electricity consumption may consider the flexibility of an On/Off peak block.  This allows block purchases for on-peak hours and a different amount for off-peak hours.  This works well for businesses that have a great amount of control over power consumption and can shift load to more favorable hours of operation.

Blocks may be purchased at any time for standard market periods such as RTC or for on/off peak. These options may be combined to further define the customer’s consumption parameters and select a period of time to lock in their energy price.  The amount of electricity required in a block, and the time period of the block, are determined by a customer’s individual needs.  All electricity consumption beyond the block amount for that hour is priced at the day ahead or real time index clearing price.

Another benefit of a block and index option is that blocks of power can be layered in throughout the contract period.  These blocks can be layered or stacked to provide additional price certainty.

Blocks are settled on a calendar month that may or may not coincide with a meter read.  Consumption for the month is billed at index or real time prices, and then the block settlement from the previous calendar month appears as a contract charge adjustment on the current bill.  So in essence, the block settlement will lag the actual consumption by a month in most cases.

GDF SUEZ offers two types of electricity block purchases.

The first is the standard power block available in specified quantities for standard market periods.  These blocks can be purchased at various times during the contract period and layered or stacked upon each other within the same time period. 

The second option, which requires more risk management, is a Heat Rate Block that comes with the same standard market periods and has minimum size requirements. The price of the power for these blocks is based on a pre-defined heat rate factor multiplied by the settlement price for NYMEX natural gas for the month, plus the retail adder.  The NYMEX gas price may be locked in advance for certain time periods to provide further control over the pricing mechanism. Many customers that closely follow natural gas utilize a Stipulated Quantity Heat Rate Block.  This allows them to take advantage of movements in the natural gas market where natural gas is a major factor as a feedstock for power.