Tag Archives: supply contract

In this article, we discuss 11 different advantages of energy deregulation.

Gas pipeline

Find the “Right” Product

Purchasing energy through the utility is only offered as an indexed product. The utility either generates or purchases the supply and charges a fee and the price fluctuates with the market. For instance, natural gas demand is much higher in the winter in the Northeast and prices typically rise with demand. Purchasing energy from a competitive supplier allows the end-user to manage rate fluctuation exposure and choose a product that fits savings goals and risk tolerance.

Lower Energy Costs

Many professionals are able to lower overall energy costs for their facilities by finding the right product and purchasing competitive supply. In some cases, the savings are significant and can make a direct positive bottom-line impact for the customer. Typical supply side savings are in the 10-20% range (based on utility rates at the time end-user enters into a competitive supply contract).

Price Certainty

Fixed price products decrease rate volatility and hedge against future pricing increases. The supply rate charged by the utility is a variable rate and can fluctuate based on many factors that affect the supply cost. Customers electing a fixed price product will eliminate rate fluctuations during the contract term.


Deregulation has created products of all shapes and sizes depending on the unique needs for a particular facility. Unlike purchasing supply from the utility in a one size fits all product, competitive purchasing allows the end-user to create a forward thinking energy purchasing strategy.


The reliability of your electricity does not change because you take advantage of deregulation. The infrastructure that transmits and distributes the energy is still handled and guaranteed by the regulated utility regardless of where you purchase the supply. You still contact the utility if the power goes out in a storm or if you have questions about your bill.

Products and Contract Terms

Prior to deregulation, utilities charged a monthly rate and the customer paid whatever the utility charges (usually determined by costs plus a fee). Deregulation has delivered a wide range of products and terms for the customer to choose from. The influx of new products also creates risk for the end-user because you could potentially choose a product that costs rather than saves money depending on unique energy needs. Many end-users enlist a broker to find the best product, term and pricing. Such options include:

Fixed Pricing

The rate is fixed for the duration of the contract. The options for fixed pricing include “all-in” or “energy only” contracts. Fixed pricing requires forward-looking intelligence to determine where the energy market is today and where it is expected to go throughout the term of the contract.

Index Pricing

An index pricing structure is essentially how the utility charges customers for supply. The pricing is an index price plus a supplier adder. Customers can typically purchase an index product through competitive markets at a rate lower than the rate charged by the utility.


A discount rate floats with the utility, but is discounted a certain percentage. Other pricing mechanisms that are advantageous to particular customers based on usage profile: “block and index”, “caps” and “collars”.


The contract term is a key component for any deregulated supply contract. Customers should carefully analyze forward-looking energy pricing estimates before locking into a long-term contract. All supplier quotes should provide pricing for multiple terms: 6 months, 12 months, 24 months, 36 months etc. Pricing for multiple term lengths will also provide insight into how the utilities view future energy pricing forecasts.


An option contract gives customers the ability to lock into a fixed price per KWH contract to reflect current pricing at any time during a variable price contract.

Monopoly electric companyThe high level concept of energy deregulation is defined as when government reduces its role and allows industry greater freedom in how it operates. Similar to deregulation in other industries like telecommunication and transportation, energy deregulation involves the purchase of electricity and natural gas through a competitive market. In a regulated market, commercial, industrial and residential users of electricity and natural gas are forced to buy energy through the utility without competition.

The lack of competition in the market increases the cost to the end user because the utility can charge any rate it can justify to the regulatory authorities and the suppliers are not forced to compete for the business. Deregulated markets promote competition between suppliers because it permits customers to choose the lowest cost supplier with the most advantageous contract terms. Many would argue that deregulation lowers costs for the end user and has stimulated suppliers to create advantageous product offerings for consumers.

How It Works

Electricity and natural gas bills contain charges and rates for demand and supply. The demand or distribution charge is paid to the entity, typically the local regulated utility, who owns the lines and/or pipes that distribute the electricity or natural gas to customers. The demand charge is regulated by a Public Utility Commission and the delivery is guaranteed by law. A common question from first time procurement customers is “Could I lose access to electricity and natural gas by switching to a competitive supply contract?” The resounding answer to this question is: “NO”. You do not risk losing access to electricity and natural gas because you choose to take advantage of deregulation. The transmission and delivery is guaranteed by the PUC and the local utility that owns the transmission lines and/or pipes.

Customers can save by taking advantage of deregulation because it allows supply firms to compete for your business and aggregate usage with other customers creating economies of scale and lower pricing. The typical supply charge savings ranges from 5-20% on average compared to purchasing supply through the utility (owner of the lines/pipes). Many factors can impact the savings including the contract length, natural gas, oil and other commodity pricing fluctuations, the float  provided for in your supply contract, and various outside influences that can negatively or positively affect commodities markets.