Supply Contract Models & Tariff Structures

Energy-Only vs. Capacity-Included Pricing

• Energy-Only Markets (e.g., ERCOT): No mandated capacity market. Retail rates primarily reflect energy costs and ancillary services. Customers do not pay a separate capacity charge. Relies on high scarcity pricing (e.g., ORDC adder up to $5,000/MWh) for reliability.
• Capacity Markets (e.g., PJM, NYISO, ISO-NE, MISO): Have mandatory capacity requirements. Suppliers must cover capacity costs based on customer tags (PLC/ICAP). Contracts can be:
  • Capacity-Included: Capacity costs are bundled into a fixed $/kWh energy rate. Offers simplicity and budget certainty but often includes a risk premium. Less common for large C&I.
  • Capacity Pass-Through: Capacity charges are billed separately based on the customer's actual tag (PLC/ICAP) and the official capacity market clearing prices ($/kW-month). Allows customers to benefit directly from reducing their peak load contribution but introduces cost variability based on auction outcomes. Preferred by many large customers.

Brokers must clarify whether a quoted rate in a capacity market includes capacity costs or if they will be passed through separately.

Fixed vs. Pass-Through Components

Beyond capacity, other cost elements can be fixed or passed through:

• Fixed Pricing: Bundles as many components as possible (energy, capacity, transmission, ancillaries, RPS compliance, supplier margin) into a single locked $/kWh rate for maximum predictability.
• Pass-Through Pricing: Customer pays the actual cost for specific items, often plus a small admin fee. Common pass-through items include:
  • Capacity (as discussed above)
  • Transmission charges (based on NSPL tag or utility riders)
  • Ancillary services
  • RTO/ISO fees
  • Renewable Portfolio Standard (RPS) compliance costs
  • State-mandated surcharges (e.g., NYSERDA fees)
  • Sometimes nodal congestion or line losses (less common for standard contracts).
  Pass-through offers transparency and potential savings if actual costs are lower than forecasted, but increases budget uncertainty.

Hybrid Models: Index, Block-and-Index

• Index Pricing (Variable/Floating): Supply price is directly tied to a wholesale market index, such as the Day-Ahead or Real-Time Locational Marginal Price (LMP) at a specific hub or zone, plus a fixed adder ($/MWh) covering supplier costs and margin. Offers potential for lowest cost but carries full exposure to market volatility. Suitable for customers with high risk tolerance or significant load flexibility.
• Block-and-Index (or Index-Plus): A common hybrid strategy. A portion ("block") of the customer's expected load (e.g., a fixed MW amount or % of usage) is purchased at a fixed price, while the remaining usage ("swing" or variable portion) floats on an index price.
  • Provides budget certainty for baseload usage while allowing potential savings on variable load.
  • Often tailored to client's risk tolerance (e.g., fix 70% block, index 30%).
  • Requires careful management of the index exposure, often paired with curtailment plans for high-price events.
  • Becoming more accessible to mid-sized C&I with modern energy management platforms.
• Laddered Contracting: Spreading procurement over time by layering multiple contracts (e.g., buying 1/3rd of load each year for 3 years) to dollar-cost average and avoid locking in all volume at a single market point.

Demand Charge Structures (Supply Side)

While most demand charges are on the utility delivery bill, some supply-side pricing structures might involve demand-related components:

• Generation Demand Charges: Rare in competitive contracts, but sometimes seen in utility default supply tariffs for large customers (e.g., reflecting capacity costs per kW of peak).
• Subscription Models (e.g., for EV charging): Some innovative rates replace traditional demand charges with a fixed monthly fee based on subscribed capacity (kW), common in new EV tariffs in California.
• Implicit in Fixed Rates: Suppliers offering fixed rates implicitly factor in expected demand patterns and associated costs (like capacity) into the overall price.

Generally, competitive suppliers prefer to handle capacity costs via pass-through or energy rate inclusion, rather than adding their own separate demand charge line item.