Energy Procurement – Why Timing Matters

In the realm of energy contracts, the adage, "time is of the essence," holds significant weight. 

The energy market is a dynamic entity, with prices fluctuating based on myriad factors such as demand, supply, weather conditions, and geopolitical events. These fluctuations can occur daily, monthly, or seasonally. Therefore, timing your energy contract purchase can have a substantial impact on the cost.

Purchasing a contract when energy prices are low can lead to considerable savings. However, knowing what kind of contract to sign requires a keen understanding of market trends and the ability to anticipate future price movements. 

How is Index vs. Future Pricing Impacted?

Historically, electricity demand has been at its lowest during the spring and fall seasons. Consequently, the index clearing cost of electricity during these periods is usually lower than index prices during the summer and winter months.

The rationale behind this is simple - people tend to use more electricity for air conditioning in the summer and heating in the winter, which drives up demand and, as a result, index prices. This dynamic can influence future market prices. For instance, a particularly hot summer this year could potentially drive up future prices for the following year, just as a cooler summer could cause future summer prices to fall.

Summer is typically the time of year with the highest electricity demand on electrical grids, while winter is typically the time of year when gas used to generate electricity is most expensive. This, however, drives up winter electricity costs too because people are using that same gas to heat their homes and businesses, which cuts into supply. As such, the geographical location where you consume energy matters, so that must be taken into consideration since some regions experience more extreme heat and cold than others.

In recent years, with the push for clean energy and ongoing global geopolitical events, there have been times when future prices have peaked and fallen. However, historical price movements don't necessarily dictate future price movements, which makes being well-informed of current market conditions crucial.

The Warm Winter Trend

In the last few years, February has witnessed a remarkable phenomenon - a significant drop in energy market prices. The prices of both the current index as well as future electricity and natural gas saw a decline, primarily due to the fact that we have had several extremely warm winters, year after year.

This temporary shift has proven advantageous for those who capitalized on it. Surprisingly, over the past several years, February has emerged as one of the most favorable times to make energy purchases. To illustrate this point, consider the graphs and tables below for the Wholesale Calendar Year 2025. Note that these trends are not exclusive to this year and are evident in other forward pricing as well.

ISO-NE Internal Hub ATC DA Wholesale Calendar Year 2025

This graph shows the historical daily wholesale pricing movements of the future calendar year 2025 for ISO-NE Internal Hub ATC DA in kWh.

Future Movement of 2025
ISO-NE Internal Hub ATC DA Wholesale Calendar Year 2025

This table shows the historical monthly wholesale average price of the future calendar year 2025 for ISO-NE Internal Hub ATC DA in kWh. As can be seen in the table, the prices move up and down for the year 2025.  Retail rates are based on where the wholesale market is at a given time, therefore it is better to fix in a portion or all of one’s usage when prices are lower. Green indicates lower pricing and red indicates higher pricing.

Actual Average Index Clearing Prices
ISO-NE Wholesale Electricity Market - Monthly Average Day Ahead LMP Clearing Price

This table shows the actual index monthly wholesale clearing price in ISO-NE for Day Ahead in kWh. In other words, it is the price that one would be charged for any portion of load that they did not fix into with a rate ahead of time.  Analyzing this table of index clearing prices, along with the current future values of the wholesale market can help one determine whether a fixed, index, or hybrid strategy is more favorable at a given time. Green indicates lower pricing and red indicates higher pricing.

PJM Western Hub ATC DA Wholesale Calendar Year 2025

This graph shows the historical daily wholesale pricing movements of the future calendar year 2025 for ISO-NE Internal Hub ATC DA in kWh.

Future Movement of 2025
PJM Western Hub ATC DA Wholesale Calendar Year 2025

This table shows the historical monthly wholesale average price of the future calendar year 2025 for PJM Western Hub ATC DA in kWh. As can be seen in the table, the prices move up and down for the year of 2025.  Retail rates are based on where the wholesale market is at a given time, therefore it is better to fix in a portion or all of one’s usage when prices are lower. Green indicates lower pricing and red indicates higher pricing.

Actual Average Index Clearing Prices
PJM Wholesale Electricity Market - Monthly Average Day Ahead LMP Clearing Price

This table shows the actual index monthly wholesale clearing price in PJM for Day Ahead in kWh. In other words, it is the price that one would be charged for any portion of load that they did not fix into with a rate ahead of time.  Analyzing this table of index clearing prices, along with the current future values of the wholesale market can help one determine whether a fixed, index, or hybrid strategy is more favorable at a given time. Green indicates lower pricing and red indicates higher pricing.

ERCOT Houston Load Zone ATC RT Wholesale Calendar Year 2025
 
This graph shows the historical daily wholesale pricing movements of the future calendar year 2025 for ISO-NE Internal Hub ATC DA in kWh.

Future Movement of 2025
ERCOT Houston Load Zone ATC RT Wholesale Calendar Year 2025

This table shows the historical monthly wholesale average price of the future calendar year 2025 for ERCOT Houston Load Zone ATC RT in kWh. As can be seen in the table, the prices move up and down for the year of 2025.  Retail rates are based on where the wholesale market is at a given time, therefore it is better to fix in a portion or all of one’s usage when prices are lower. Green indicates lower pricing and red indicates higher pricing.

Actual Average Index Clearing Prices
ERCOT  Wholesale Electricity Market - Monthly Average Day Ahead LMP Clearing Price

This table shows the actual index monthly wholesale clearing price in ERCOT for Day Ahead in kWh. In other words, it is the price that one would be charged for any portion of load that they did not fix into with a rate ahead of time.  Analyzing this table of index clearing prices, along with the current future values of the wholesale market can help one determine whether a fixed, index, or hybrid strategy is more favorable at a given time. Green indicates lower pricing and red indicates higher pricing.

Managing Energy Spend

Typically, the goal of an electricity strategy should be to pay the lowest possible price. As can be seen in the graphs and tables, future and index prices move up and down because of a variety of factors. The optimal time of year to lock in or receive index prices is ultimately unpredictable. However, a buyer can weigh the risks of purchasing strategies by analyzing historical market price movement, along with current market prices, and intelligence on market conditions.

Companies like Mantis are dedicated to studying short and long-term market price trends and market conditions to help consumers make informed decisions. Electricity market dynamics that impact prices are always changing, which underscores the importance of staying updated with market trends to make strategic energy purchases. 

So, What Can You Do?

Another Approach

The three general choices for purchasing an electricity strategy are:

•    fixing in all of the load at a rate ahead of time,
•    floating all of the load to receive actual clearing index rates,
•    or a hybrid strategy that is a blend of fixed and index pricing. 

The downside of fully fixing in pricing is that if prices move lower, you would pay more than necessary. The downside of totally floating on the index is that if prices move up, then you would pay more than you could have. Therefore, using a hybrid strategy that blends a portion of the index and fixed helps hedge against the risk of unpredictable price movement.

Mantis Innovation offers a hybrid purchasing strategy that enables someone to pick any percentage they want to fix in and receive as index, depending on their conclusions about market conditions. This strategy involves fixing a percentage of electricity usage at a set rate and settling the remaining volume on an hourly index. This strategy also allows you to continue to increase the amount you receive as fixed pricing both before and during the term of a contract. This systematic plan employs market timing and price targets to allow for making educated decisions to manage energy spend.  

Contact Mantis today to learn more.