Block and Index
A Block & Index product combines the attributes of a fixed price or heat rate along with some degree of LMP Index pricing exposure, and has become a common product structure since the advent of deregulated electricity markets. Rather than committing to a fixed price for all of a client’s consumption, a Block & Index contract captures a fixed price or a heat rate formula for a specified portion of the client’s consumption, while the remainder is priced at the applicable LMP index. The contract price is a formula of a block price combined with the LMP index price plus a fixed retail adder as follows:
Contract Price = Block Price + Shaped LMP Index Price + Retail Adder
A fixed price or heat rate formula for a defined amount or percentage of consumption, typically at a wholesale cost, expressed in $ per kWh
Shaped LMP Index Price:
The sum product of each LMP price and the client’s consumption above the block amount across all of the intervals in a billing period, expressed in $ per kWh
Fixed for the contract term, includes ancillary services, line losses, ISO fees, retailer margin and consultant fee, expressed in $ per kWh
Some clients use this purchasing strategy in hopes of achieving lower prices over time than offered by a fixed price product. A potential benefit of the Block & Index product is that a client does not explicitly pay for an imbedded risk premium to cover the cost of shaping wholesale block energy to retail energy consumption. However, this shaping will be achieved via the index priced portion of the client’s consumption, thereby making the client open to the unknown risk of LMP price spikes. Some retail energy suppliers prefer to sell the Block & Index product in order to transfer this shaping risk from them to the client. Also, some clients with highly unpredictable or variable energy consumption patterns may only be able to purchase their energy needs with this pricing structure.
One other feature of a Block & Index product for some clients is the ability to capture fixed price or heat rate blocks during the contract term. A client can begin a contract period with an unhedged position originally priced at the LMP index, but lock in a fixed price or heat rate via a price hedge at some point after the contract commences. Amerex advised our Block & Index clients on capturing price hedge opportunities, and ensures that the retail providers are quoting prices at or near the wholesale level.
To learn about additional electricity products, visit one of the links below or contact us to explore how a Block & Index structure may work for your business.
Other Electricity Products