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A fixed rate contract is the most basic pricing format for competitive suppliers. Fixed pricing implies a fixed price for a defined term and usually applies to the energy portion of the bill, all parts other than the local distribution company charges, taxes and any meter fee the client elects to put in place. Some bidders exclude line losses or certain ancillary charges in an effort to make their energy price look more competitive. It is the Consultant’s responsibility to identify any charge differences in bids.

Energy Charge
Nodal Charge/Credit (starting in December, depending on the bidder, Reliant variance between Interzonal point and Zonal Hub)
TDSP charges
GRE tax
PUCT tax
Sales tax
Special sales tax
City tax

Better price is a relative statement. In 2008, a four year agreement provided a lower price than a one year agreement for that first year. In 2009, a four year agreement provided a higher price than a one year agreement for that first year. The forward natural gas curve is the primary driver for this variance.

Bidders vary on this. The client has to request a given tolerance, usually 10%, 20% or full swing. Variance is based off of historical or negotiated consumption. The cost of the variance can be minimized by working with the provider if the client sees a big variance developing, but it’s still there. Some providers don’t do the math, but many do.

If the retail electric provider is amenable, clients can (this is usually an option, but not a requirement). If the contract is above market, the cost of selling that fixed position will, however, be rolled into the new agreement or expensed immediately. In some instances, the benefit from selling a low contract can also be used in blending a lower future term agreement.

Most providers like blend and extends because they retain the client and avoid the bid process as well. The new rate should be calculated on the value of the forward contract at the date of the blend and extend. TEO usually prefers to run a bid on that term at the same time to make sure that the extend offer is competitive.

This is a function of the client’s expectations regarding the market, the situation associated with the property in question, and the risk appetite of the client.

The following components can fluctuate.

Nodal Charge/Credit (starting in December, depending on the bidder, Reliant variance between Interzonal point and Zonal Hub)
TDSP charges
GRE tax
PUCT tax
Sales tax
Special sales tax
City tax

In addition, you can receive charges associated with consumption outside of the variance tolerances, if these are a part of your agreement.

Market Clearing Price for Energy (MCPE) pricing, as provided by ERCOT, is the highest price associated with a congestion zone for a Settlement Interval for Balancing Energy deployed during a Settlement Interval. This ERCOT managed index is offered as a pricing basis for energy under certain contracts. In addition, some contracts default to MCPE pricing at the end of their term.

MCPE pricing is usually volume weighted. If the meter is scalar, it is based on the scalar profiles set by ERCOT. If it is IDR, it is based on the 15 minute interval consumption of the IDR meter.

A bill can be as high as the MCPE market is. Historical peaks can be analyzed, but it is impossible to provide a ceiling number. In 2003, before certain market rules established by ERCOT, the market spiked at $10,000/MWH for a short time. New rules have kept it well below that, but 2008 market issues when two nukes were down saw spikes as high as $2200/MWH.

Different bidders have different rules. Many set it at $0, some set it at $20/mwh, and some have no minimum. This is more important when you have flat load consumers that have significant load in the offpeak hours. We’re talking about very few hours in a year in the North zone.

It varies between bidders. ERCOT fees, ancillaries and line loss are the principal components. Some are starting to pull line loss out as a separate charge. The bidder’s profit and the agent fee are also a part of the MCPE adder.

The price of gas is an indirect risk in MCPE agreements. The primary driver in MCPE contracts is disruption in market capacity. A major failure of some of the principal baseload plants like a nuclear facility is the big driver in market spikes here. Natural gas increases raise the overall level of MCPE on a blended basis, but will not move the market like a supply disruption.

It depends on the provider, but this is usually available; however, it is usually necessary to have a larger facility before some of these mixed contracts become an option.

MCPE pricing is runs between $.01 – $.035/kwh below starting fixed price contracts; however, the primary motivation for an MCPE agreement is the ability to switch away from it to a fixed price based on a more competitive market in the future. Consider it a bridge. Both heat rate contracts and MCPE agreements offer that option; however, heat rate agreements keep you near fixed pricing for the near term whereas MCPE agreements do not. MCPE agreements carry capacity exposure, but significant capacity variance is more likely in shoulder months when plant turnarounds are scheduled. Most capacity is on line and ready for summer demand in May/June.

At present, very few contracts specifically address nodal pricing. Some do and take an approach that limits the client’s exposure. Most plan to roll it into existing agreements through change in law. Depending on your market, there may or may not be an increase associated with the move to a nodal system; however, it is something that should be identified separately in your contract.

A longer term MCPE agreement will usually have a lower bidder margin and, if including line loss, will reflect the strip value of forward gas prices with a slight risk factor (if longer term strip gas prices are declining, line loss could also reflect the lower strip price and lower your MCPE adder).

Heat rate pricing refers to the use of natural gas pricing to establish the price paid for electricity. It is composed of an adder and a multiplier. In most cases, a client can ask for one of the numbers to be in a certain range and the bidder will adjust the other number. An extreme case of this would be a zero multiple, which would give you a fixed price contract. As the multiplier goes up, the heat rate is more and more susceptible to changes in the price of natural gas. The formula is:

Price of gas x Heat rate multiplier + heat rate adder = Price of electricity

The price of gas is usually based on NYMEX or Houston Ship Channel, but always refers to a traded index. Usually clients elect to lock the price of natural gas for a period of time. If it is not fixed, the price is usually locked for the next month in the last three trading days of the pending month.

The price is fixed for the period the client elects to lock. Risk is dependent upon whether the market moves up or down over that term.

The price of natural gas changes constantly.

The heat rate multipliers are managed through a bid process. Your consultant manages the bid process to confirm an even playing field and consistent bidding. The final electric price is based on the heat rate price negotiated and the appropriate index price of natural gas. Since the index is traded openly, variances between your lock and the market can be identified and discussed.

TDSP charges, nodal pricing (starting in December), and taxes.

By locking the gas price for the full term of your agreement, you have fixed your heat rate contract.

There is an adder for the heat rate contract; however, as discussed above, the adder for the heat rate contract is also a function of how much natural gas volatility the client wants. With MCPE pricing, the cost of energy is a pass through, so the costs of moving that energy to the local distribution need to be covered specifically.

They should be. It is the responsibility of your consultant to insure this in the bid process.

Heat rate adder
Energy Charge
Nodal Charge/Credit (starting in December, depending on the bidder, Reliant variance between Interzonal point and Zonal Hub)
TDSP charges
GRE tax
PUCT tax
Sales tax
Special sales tax
City tax

The gas trigger works differently for different providers. It is usually a recorded voice activation. The client or his broker can call in, ask for the price for a particular strip, then the REP arranges for the purchase, confirms the rate and locks. The lock is followed up with an executable document, but the client has fixed the price on the call. Different desks are more or less accessible, and this plays a roll in determining the client’s comfort with a heat rate deal.

With a block or step block price contract, the client arranges for the purchase of a certain block of power and usually purchases the remainder at MCPE pricing. Blocks can either by 24 x 7 x MW or some subset of the same (off-peak, on-peak, summer, winter or shoulder months, etc).

This depends on the bidder and the property.

A block of power should have a lower price than a variable load. With a variable load, you’re pricing in options to shed or add consumption. There is however, an unasked part to this question. Do you think the variable pricing of the remainder, when averaged with the lower block price, will give you a lower overall price.

There is usually a MCPE plus adder calculation for the variable portion of the load.

If you don’t use the whole block, your provider will have to use it or sell it. It is usually priced against balance power and the difference is billed to you. Some but not all providers will also provide a credit if the net is in your favor. This is spelled out in the agreement.

A good question for any of these contract structures. This depends on the property and how much risk you want to carry. It is one of a number of options that we can discuss.

Things to consider are:
a) Load profile of the property
b) Size of the property
c) Load management ability of the property
d) Present occupancy
e) Pending and future lease agreements
f) Importance of budget stability to tenants
g) Importance of budget stability to investors
h) Contract term being considered
i) Present market pricing and expectations about future market changes
j) Pending capital adjustments
k) Time available to address energy variances – daily, monthly, quarterly, yearly, bi-annually.

Call your local distribution company. The Retail Electric Provider is not in charge of local distribution. Numbers for various LDCs are as follows:

Centerpoint Energy, 800-332-7143
Oncor Electric Delivery, 888-313-4747
AEP Texas Central, formerly CP&L, 866-223-8508
AEP Texas North, formerly WTU, 866-223-8508
TNMP, 888-866-7456

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