Future-Dated Energy Contracts.

What is a Futures Contract?

In the world of commodity trading, particularly related to energy commodities like electricity and natural gas, traders have the option to take title to energy in the future at a certain price and delivery date. In other words, a trader could enter into a contract today to purchase natural gas at a pre-determined price six months into the future. These agreements between buyers and sellers in the wholesale energy market are also referred to as futures contracts. In the retail energy market, energy brokers can also offer a derivative of a futures contract by offering their customers a fixed price that begins on a certain date in the future. Because all retail energy suppliers hedge their energy purchases in the wholesale market, this future-dated retail contract is simply a representation of the underlying futures contract trade in the wholesale market.

How Can I Utilize Future-Dated Contracts As An Energy Broker?

Future-dated retail energy supply contracts are a powerful tool for energy brokers. There are many times when the futures market tends to be trading lower than the spot market. These are great times to notify your customers about market opportunities so they can lock in lower prices for future energy supply. Some sophisticated energy brokers help their clients develop annual budgetary goals. Utilizing future-dated contracts is an outstanding way of helping your customers achieve budget goals. When futures prices are trading within a certain range, your customers can execute retail supply contracts to secure those rates for the future.

Can Customers Get Out Of A Future-Dated Energy Contract?

Usually not. The only reason a customer might want to leave an energy contract early, or before it begins for that matter, would be if the market prices were even lower than the price of the contract. Otherwise, if prices were higher, the customer benefits by honoring whatever contract might be in place at a lower rate. Should the customer attempt to leave a supply contract early or before it begins, retail suppliers will typically charge the customer an early termination fee that can be equal to or greater than the cost for them to liquidate the contract in the open market. When market prices are lower than the value of the contract, the supplier incurs a loss when selling the energy back to the market. That loss is then passed to the customer in the form of an early termination fee.

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