There are both advantages and disadvantages to buying energy at index prices. This article explains how wholesale index markets work. It also shows how they can affect your energy bills. Most businesses choose fixed-rate contracts. However, some large energy users choose index pricing. In this type of pricing, energy rates go up and down with the market. Index pricing can be helpful when market prices are low. Businesses can save money during off-peak times or market downturns. This article explains how energy index contracts work and how pricing is structured.
What Are Energy Index Rates?
Energy index rates are different from fixed rates. Fixed rates stay the same for a set time. Index rates change over time. They go up and down with the electricity or natural gas market. There are also hybrid energy contracts. These contracts include index rates as part of their terms. Now, let’s look at the different types of energy contracts available to businesses and how index pricing works.
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Types of Energy Index Contracts
Block + Index
A block + index contract lets a customer lock in part of their energy use at a fixed rate. The rest of the energy use follows the market price. This means some energy is protected from price changes. The remaining energy cost goes up and down with the market. This type of contract is useful for businesses. It helps reduce risk during certain times. It also allows them to benefit when market prices are low.
Fixed-Adder
A fixed-adder contract is fully variable. The energy price changes with the market. The supplier adds a fixed margin on top of the market price. So, the customer pays the market rate plus this fixed extra cost. These contracts are often used by businesses that pass energy costs to their customers. For example, an oil refinery may include energy costs in the final price of its products.
Straight Index
A straight index contract follows the customer’s hourly energy use. The customer pays the market price for each hour. This price is multiplied by how much energy is used in that hour. This type of pricing changes in real time. It is different from fixed-adder contracts, which are often based on average monthly prices.
Benefits of Index Pricing
There are many reasons why a business may choose an index-based energy plan or a hybrid rate.
Off-Peak Usage
If your business uses a lot of energy during off-peak hours, you may save money with index pricing. Energy prices are usually lower when demand is low.
Cost of Goods
If energy costs are part of your product cost, index pricing may work well. This is helpful if you pass energy costs to your customers. In this case, changes in energy prices do not strongly affect your profits.
Flexibility
Index contracts give more flexibility. Fixed-rate contracts lock you into one price for a set time. Index pricing allows your rate to change with the market. You may also choose to lock in a rate later when prices are better.
Which Businesses Should Choose Index Pricing?
Index pricing may be good for:
- Large energy users
- Factories and industrial sites
- Businesses with flexible operations
- Companies that can manage price risk
Fixed pricing may be better for:
- Small businesses
- Businesses needing stable budgets
- Low energy users
How Index Pricing Is Calculated
Energy index rates are calculated in different ways. This depends on the type of energy, the contract, and the supplier. Usually, natural gas and electricity are calculated differently. Each has its own method. Now, let’s look at how pricing works for both natural gas and electricity.
Natural Gas Index Pricing
Natural gas prices still change every day based on the market. Suppliers still use the price on the last trading day of the month. Let’s look at a modern example:
- A supplier offers an index contract
- The formula is:
(market price) + $0.60 margin
Now assume:
- The January 2026 natural gas contract expires on December 29, 2025
- The market price on that day is $2.85 per DTh
Final price calculation:
- $2.85 (market price) + $0.60 (supplier margin)
- Total = $3.45 per DTh
This is the price the customer pays for January.
Electricity Index Pricing
Electricity index pricing works differently from natural gas. Electricity prices change every hour. This is because supply and demand change throughout the day. In a straight index contract, the customer pays the market price for each hour. This price is multiplied by how much electricity is used in that hour. Let’s look at a simple example:
- A business uses electricity during one day
- The supplier charges:
(hourly market price) + $5 per MWh margin
Now assume:
- At 2:00 PM, the market price is $60 per MWh
- The business uses 2 MWh in that hour
Calculation for that hour:
- Market price: $60
- Supplier margin: $5
- Total price: $65 per MWh
- Total cost: 2 MWh × $65 = $130
This process repeats every hour of the day. The final bill is the total of all hourly costs.
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Want to Learn More About Index Rates?
Index energy pricing can be a useful option for some businesses. It works well for businesses that use energy during off-peak hours. It is also helpful for those who want more flexibility. It can also benefit businesses that pass energy costs to their customers. If you want to learn more about energy markets, index pricing, or hybrid contracts, you can contact our team of energy experts today.