Posted by Phil Cerria on Feb 13, 2017
Due to high winter demand and limited natural gas pipeline infrastructure, natural gas rates rise when the temperature drops. Your business must be prepared to avoid overpaying in the event of another polar vortex, like the one in 2014.
Part one of this blog series explored in depth why natural gas prices are so high in the winter. In this installment, learn what you can do to protect your business.
The first step you should take is to choose a pricing structure that suits your budgetary needs. Three options are available: fixed pricing, variable pricing, and block and index pricing.
Business owners and operations managers often want fixed pricing because it’s a form of price protection. You take on less risk with fixed pricing because your price remains the same throughout the year, even during extremely cold winter months.
No more getting blindsided by high rates – you know exactly what to expect.
Fixed pricing is a great strategy if you want stability, but you may leave money on the table if the market goes down and natural gas rates drop.
This is a bigger problem for industrial customers, which use much more natural gas than small businesses. Small business owners are often happy when they meet their budget goals, which is easily achievable through fixed energy rates.
Your energy provider should ask you upfront whether you have an energy budget. Many small businesses don’t have one. Consider setting a budget or establishing a buying strategy before you choose an energy plan.
You should also have a good idea of what your risk tolerance is before choosing a plan. When you know how well your cash flow can tolerate high natural gas rates, you’ll have a better idea of whether fixed pricing is necessary.
While you can lock in a fixed rate plan at any point during the year, you should do so while prices are low. Typically, you wouldn’t want to sign up for a plan during cold winter months.
Variable pricing allows you to achieve the market price of natural gas. Many times, this is the least expensive natural gas available. If you’re prepared to pay more in winter months, you get the low variable rate for the rest of the year.
However, you take a risk during winter months. Will you have enough cash flow in the event of a polar vortex? You may save more money over the course of the year, but you must ensure your budget is strong enough during the winter to handle high natural gas prices.
Block And Index Pricing
If you’d like to take advantage of both fixed pricing and variable pricing, here is your solution. Block and index pricing allows you to fix a portion of your energy needs and maintain variable pricing for the remaining portion.
Many large industrial companies prefer block and index pricing because they want some insurance against high winter natural gas prices, but their load is large enough that they need access to less expensive variable pricing when the market goes down.
Typically, these companies lock in 80% of their winter load and 30% of their summer load with fixed pricing. When you choose block and index pricing, you’re protected from soaring winter natural gas rates but can still take advantage of low market prices during other seasons.
Block and index pricing is designed for businesses with larger energy loads. Structuring the “blocks,” or fixed portions of a load, is a complicated process with limited benefits for companies with smaller loads. So, smaller businesses often choose between fixed and variable pricing.
Partnering With The Right Natural Gas Provider
When it comes to protecting your winter energy budget, price structuring is only one facet of an effective energy plan. You need a natural gas provider that helps you implement cost-saving strategies and take advantage of statewide energy programs.
In part three of this blog series, learn what your provider should do to lower your energy costs. The right natural gas provider mitigates the impact of rising winter natural gas rates, allowing you to save your budget for higher-level business goals.
Download this free whitepaper to learn more about why natural gas rates are high in the winter and what your natural gas provider should do to protect your budget.