Whether you are a business owner or energy broker helping your customers to develop an effective energy strategy, it’s imperative that you understand the various types of energy supply products available in the market. Although most retail energy suppliers market fixed-rate energy plans, there are different variations of electricity and natural gas plans that might better suit your needs. In this article we will explore the importance of these supply plans and how to pick the best energy supply product based on your energy needs.
Why Energy Brokers Should Understand Energy Supply Product Options
If you are an energy broker or energy sales consultant working for an energy brokerage firm, then it is critical that you educate yourself on the wholesale energy market, retail energy market, history of energy deregulation, and the different types of energy plans available to your customers so that you can be a valuable asset to the market.
Commercial and industrial customers consider hiring energy brokers so that they can find lower-cost energy, become more sustainable through green energy solutions, and to eliminate the headaches associated with managing energy costs. If a customer decides to utilize your broker services, you need to be knowledgeable enough to provide true value. In fact, the best energy brokers in the nation not only understand the anatomy of an electricity bill, but they are also experts in evaluating business energy consumption, electrical transmission rates, energy capacity, energy efficiency, and other factors that influence energy costs.
If you are interested in enhancing your career, becoming a better energy broker, and earning six figures by selling energy, then you need to become an expert. Learning about the various types of retail energy supplier plans is one component to becoming a successful energy broker. Let’s explore the various rate plans in more detail below.
Types Of Energy Supply Product Structures
There are many standard and customer energy supply products available to commercial and industrial customers in deregulated markets. Outside of standard fixed-rate contracts, retail suppliers offer index-based products, block + index products, load-following block+index products, and other custom hybrid structures.
Successful energy brokers understand these product structures and how they are best applied to a customer’s usage profile to offer a balance of risk vs reward. Below we outline the various supply structures available and what types of customers for whom they are best:
Fixed Energy Rates
Standard fixed-rate supply products are the most common in the retail energy sector. A fixed-rate agreement between a customer and a supplier is straightforward. In the contract, the supplier agrees to sell electricity or natural gas to the customer at a fixed price per kWh or CCF for a certain period.
Although customers typically pay a premium for a fixed rate, they are very valuable because they shift the risk of the energy market to the supplier and away from the customer. If the customer is buying energy from their local utility company or on an index-based energy rate, then they are at the mercy of the volatile energy market. Fixed rates, on the other hand, remove this risk. Retail suppliers utilize energy futures products to guarantee a certain price per unit of energy.
Fixed rates are ideal for customers looking to control costs, have budget certainty, and hedge against volatile markets. Below is an example of what a fixed-rate energy contract might look like when compared to the market:
Index Rates
Index energy rates, on the other hand, are the exact opposite of fixed rates. In an index-based contract, the energy supplier passes through the wholesale cost of the market each hour, day, week, or month with a slight mark-up.
Although index rates can be very low and attractive when market prices are less volatile, they also carry a great deal of risk. When certain events happen that impact the market, such as a severe Winter storm, energy index prices can double and triple. Customers buying index rates assume the full risk of the market.
Index supply products are good for those customers who traditionally pass through the costs of energy into their products or services. Oil refineries, for example, typically buy electricity on the index market since they pass those costs along in the price of the refined fuel. The chart below outlines what an index rate looks like:
Hybrid Energy Rates
There are many other supply products available that offer a combination of fixed and index rates. Larger, more sophisticated energy customers typically utilize a combination of fixed and index rates to achieve the best balance between price and risk. Let’s explore some of these hybrid energy plans in more detail.
Block + Index
A traditional block + index product allows customers to lock or hedge certain quantities of energy while floating the index market for other quantities.
Load-Following Block + Index
In a load-following block + index, the fixed portion of the product follows the customer’s load shape, so customers can lock in percentages of their load and not usage quantities.
Financial Products
Some of the largest users of energy even utilize financial hedges, collars, and options to maximize their benefit and control energy price risk. These companies often utilize the services of an energy trader or trading company to help them offset the volatility of the market using financial instruments.
These hybrid products are best for larger customers who want to protect themselves during potentially volatile market times while taking advantage of low-cost index rates during times of lower demand. In the chart below, a traditional block + index product is outlined:
Choosing The Right Product For Your Customers
Energy brokers trying to help their customers navigate the energy markets must understand how to match the right type of energy product with the right customer. There are several things to consider when shopping for energy.
Understanding Energy Risk Tolerance
First, it’s important to interview your customers and understand their risk tolerance. Customers that are interested in price certainty with no risk are much better candidates for fixed-rate plans when compared to those who are willing to “play the market” a bit more. It’s important to gain an understanding of your customer’s risk profile.
Examine Usage Patterns
Next, look at their energy usage patterns. Certain types of energy supply products are better for consistent energy consumption, while others are better-suited for unpredictable usage. For example, a traditional block + index product might not work for a manufacturer with inconsistent power consumption as the pre-purchased blocks could supersede their usage during downtimes. A better solution for this type of customer might be a load-following product.
Choose The Right Supplier
Finally, it’s important to place your customers with an energy supplier that can service the chosen energy plan. Some suppliers are not technically equipped to handle a load-following block + index or complex financial hedging strategy, while others are better suited for fixed-rate plans. Having a comprehensive understanding of the best energy suppliers and their capabilities is crucial to meeting your customers’ needs.
Need Help Choosing An Energy Supply Plan?
Being able to fully understand the complexities of each energy supply product and how they are beneficial to your customers will differentiate you as an energy broker. In fact, brokers who act as advisors are able to retain their customers for a longer period of time when compared to brokers who simply act as salespeople. Whether you are an energy broker shopping for your customers or a commercial/industrial operator, we can help you navigate your energy supply options. Contact our team today to explore more.
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