Risk tolerance considerations include:
Does your company operate best with expenses that can be predicted?
If yes, then a fixed price locked in for one to three years might be most favourable.
Does your companies' cash flow allow for significant over and under budget monthly totals?
If yes, then an index price might be most favourable.
Does your company have the ability to control what time of day energy is used and to monitor pricing?
If yes, then hourly day ahead pricing might be most favourable.
Energy pricing can differ significantly month to month and has shown more volitility in recent years.
PECO's Locational Marginal Pricing (LMP) demonstrates this trend:
In 2007 there was 160% difference between the lowest and highest month's index price
In 2008 there was 203% difference between the lowest and highest month's index price
In 2009 there was 227% difference between the lowest and highest month's index price
DAY AHEAD HOURLY PRICING
The table below shows an example of Day-Ahead hourly pricing. (A more current version can be accessed at http://www.ferc.gov/market-oversight/mkt-electric/pjm/pjm-rto-dly-rpt.pdf ) Note that the amounts are in MW, therefore divide by 1,000 to get a per kWh price. These prices do not include transmission, capacity, and other ancillary charges that make up about 25% of the total cost of energy.
This chart demonstrates the significant difference in the cost of energy at various times of the day. For instance, in the PEPCO area the energy cost per kWh between 4AM and 5AM is under 4 cents, while the energy cost per kWh between 2PM and 6PM is over 10 cents (remember these values do not include transmission, capacity, and other ancillary charges).
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