While most Pennsylvania commercial businesses, looking to get off their electric utility high default rate, will choose to lock in a fixed electric rate, another option for larger users is the index product. A growing number of alternative electricity suppliers who wish to remain competitive in the market will offer the index electric product to commercial clients who use a minimum of 500,000 k=KWhs per year. The electricity index product is a type of rate structure that ties the customer directly into the wholesale market for electricity. Because this product requires a supplier to be constantly buying and selling electricity in real time, a business customer on this product can usually opt out of his power contract without penalty. On the other hand fixed electric rate products require a supplier to buy the estimated amount of electricity a customer is expected to use during the term of their contract in advance and then sell it back them proportionally in the form of their monthly electric bill; this is the reason fixed rate customers will be charged a penalty if they try to break their contract.
It is important for Pennsylvania commercial electricity customers not to confuse the index product with other variable electric rate structures offered by suppliers. The index product will tie you directly into the wholesale market of electricity and can be monitored at PJM, the regional transmission organization that coordinates the movement of wholesale electricity for Pennsylvania and surrounding states. If wholesale power prices go down you can rest assure your commercial electric bill will reflect the lower charges. However if the market drops and you are on a variable rate that does not tie you directly into the wholesale market there is a good chance your rate will remain the same or even go up!
Since the expiration of the cap rates in PPL and PECO, the Index product has outperformed Pennsylvania fixed electric rates on an annual basis. However customers on the index product are subject to the high volatility of the energy market. In 2008 energy prices soared causing real time pricing to sharply increase. Those businesses who were tied directly into the wholesale market saw their electric bill triple in one month’s time. During periods of rising prices a customer on the index product may switch over to a fixed rate to protect against rising prices. Once locked into a fixed rate you will not be able to go back to index pricing until your contract expires. If you are a large business with a tight budget you may want to weigh the risk associated with the Index product before getting off of the more conservative fixed rate structure.
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