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What is the difference between fixed-priced and hedging energy procurement strategies?
25 October 2022
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When comparing energy procurement strategies, finding the best fit for you can take time and effort. Each approach has pros and cons, and these energy enthusiasts discuss them in further detail. Ultimately, the best decision depends on your personal preferences and circumstances, but you need to know the specifics between these two strategies to make an informed decision.
Each strategy entails price risk; depends on your risk tolerance
The main difference between fixed-priced and hedging energy procurement is the price risk that each strategy entails. With fixed-priced energy procurement, you lock in a price for your energy needs for a set period. This means that no matter what happens to energy prices in the market, you’ll always pay the same amount for your energy.
Hedging energy procurement, on the other hand, involves taking on some price risk in order to get a lower overall price for your energy needs. With hedging, you’re essentially betting that energy prices will go down during the period of your contract. If energy prices do go down, you’ll save money on your energy costs. However, if energy prices go up, you’ll end up paying more than you would have with a fixed-priced contract.
So, which strategy is best for you? It really depends on your risk tolerance and your overall energy needs. If you’re willing to take on some price risk to get a lower overall price for your energy, then hedging may be the right strategy for you. However, if you’re not comfortable with taking on any price risk, then a fixed-priced contract may be the better option.
Sofia Perez
Web developer and entrepreneur. Founder of CharacterCounter.COM.
Certainty and stability vs. flexibility
Fixed-priced contracts offer certainty and stability. You know exactly how much you’re going to pay for energy, and you can budget accordingly. This can be helpful if you’re worried about fluctuating prices. However, fixed-priced contracts can also be risky. If prices go down, you’ll pay more than you need.
Hedging contracts, on the other hand, offer flexibility. You’re not locked into a set price, so you can take advantage of lower prices when they’re available. However, hedging contracts can also be riskier than fixed-priced contracts. If prices go up, you could end up paying more than you anticipated.
So, which strategy is best? Ultimately, it depends on your specific needs and circumstances. If you’re worried about price fluctuations, a fixed-priced contract might be the way to go. But if you’re looking for flexibility, a hedging contract might be a better option.
Fixed-price is better if prices rise, hedging works if prices fall
Fixed-price energy procurement means that you agree to purchase energy at a fixed price for a specific period. This can be a good option if you expect prices to rise in the future, as you will be locked in at a lower rate. However, if prices fall, you may end up paying more than you would have if you had not locked in a fixed rate.
Hedging energy procurement means that you agree to purchase energy at a set price, but the price can fluctuate depending on the market. This can be a good option if you expect prices to fall in the future, as you will not be locked into a higher rate.
The best strategy for you will depend on your specific circumstances and what you expect energy prices to do in the future. You should speak with an energy procurement specialist to learn more about your options and find the best strategy for your needs.
Rhea Henry
Rhea Henry, a Content Strategist at EnergyRates.ca.
Hedging allows you to mix fixed and floating rates
For large consumers, choosing a singular fixed or floating price approach to procuring energy may pose problems. Fixed rates are often set above current market rates, meaning when the market rate is lower, you may be paying much more than you need per unit.
Floating rates, however, offer the benefit of lower rates when the market rate is down but exposes you to extreme fluctuations or spikes whenever something unexpected hits the overall market.
Hedging allows you to mix fixed and floating rates. Depending on how much you consume on average, you may negotiate a fixed rate within a certain threshold of consumption for that month and a floating rate for any consumption above that level.
The threshold of energy for the fixed portion can be the same month to month or vary, so businesses are able to anticipate their output and factor that into their negotiations. Large or industrial consumers who are averse to the risks of extreme price shocks or consistent overpayment may find this strategy ideal.
This is a crowdsourced article. Contributors’ statements do not necessarily reflect the opinion of this website, other people, businesses, or other contributors.
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