Ask ten commercial energy buyers whether they prefer fixed or index electricity pricing, and you'll get ten different answers. Some swear by the budget certainty of a fixed price. Others insist that index pricing delivers better results over time. Most are somewhere in between - and most, if they're being honest, aren't entirely sure whether the choice they made last year was the right one.
This is one of the most common questions I deal with in my work as a power origination professional based in Brooklyn, NY. There's no universal right answer, but there is a framework for thinking through the decision intelligently. Let me walk through it.
Fixed-price electricity supply means you lock in an all-in price per kWh for a defined period - typically 12 to 36 months. Your bill's supply cost is predictable regardless of what happens in the wholesale market. The supplier assumes the market risk; you pay for that insurance through a risk premium embedded in the fixed price.
Index-priced electricity supply means your cost tracks some market index - often the PJM day-ahead locational marginal price (LMP) at your delivery point, or a monthly average of that index. You pay what the market pays, plus a small supplier adder. When prices are low, you benefit. When prices spike, you're exposed.
There are also blend-and-extend structures, layered fixed programs, and block-and-index arrangements that sit between these poles - but fixed and index are the primary archetypes.
Budget certainty. For businesses where energy is a significant cost line and where margins are tight, not knowing what your electricity bill will be next month is genuinely dangerous. A fixed price eliminates that uncertainty. You can plan, you can forecast, you can model your margins with confidence.
Protection against spikes. Electricity markets can be viciously volatile. PJM prices during winter cold snaps, summer heat waves, and supply disruptions can spike to levels that would devastate a business running on a thin margin. A fixed price is insurance against exactly that scenario.
Simplicity. Fixed-price supply is easy to understand, easy to budget, and requires less ongoing market attention from the buyer.
Lower cost over time - on average. Because fixed prices include a risk premium, index pricing is statistically expected to be cheaper over a full market cycle. Suppliers who offer fixed prices must price conservatively to protect their margins against volatility; that conservatism is a cost to the buyer.
Participation in price declines. When gas prices fall, power prices tend to fall with them. Index buyers capture those declines immediately. Fixed buyers are locked into rates set at higher market levels.
Flexibility. Index supply often comes with shorter commitment periods and more flexibility to restructure. If your business needs change or if you want to pursue a different procurement strategy, you're not locked in.
The fixed vs. index decision is not primarily a market call - it's a risk tolerance decision. Here's how I frame it for clients across the PJM and NYISO markets:
What is the sensitivity of your business to energy cost variance? A manufacturer with tight margins and large energy spend is in a very different position than a professional services firm where energy is 1% of operating costs. The higher your energy intensity and the tighter your margins, the stronger the case for fixed.
What is your view of the market? I'm not recommending that commercial buyers try to time the energy market the way a trader would. But having some view - is the market at historically high or low levels? What does the forward curve look like? - is informative. Locking in a fixed price at the top of a spike has a very different expected value than locking in at a market low.
What is the term you're being asked to commit to? The longer the fixed-price term, the more market risk you're transferring to the supplier - and the more the supplier needs to charge for that insurance. 12-month fixed prices carry much less risk premium than 36-month fixed prices. If you're uncertain about the direction of markets, a shorter fixed-price commitment often makes more sense than a long one.
How does capacity cost uncertainty affect your thinking? As I discussed in my earlier article on PJM's capacity market, capacity costs are a significant component of all-in electricity prices and are subject to independent volatility. Some fixed-price supply agreements fix the full all-in price including capacity; others have capacity pass-through clauses that expose you to capacity market outcomes regardless of your fixed commodity price. Understand exactly what you're fixing before you sign.
Do you have the internal bandwidth to manage index pricing? Index pricing requires more active engagement. You need to understand what your index costs are each month, track the market, and be ready to lock in a fixed price opportunistically when market conditions favor it. If your organization doesn't have the bandwidth or expertise to manage that, a fixed price may be right for you even if the expected cost is slightly higher.
Many of the commercial and industrial customers I work with across the PJM and NYISO regions benefit from a middle path: not committing entirely to fixed or entirely to index, but layering their exposure over time.
The concept of layered procurement means purchasing a portion of your expected load as a fixed price now, leaving a portion on index, and adding more fixed coverage as market conditions evolve. This is conceptually similar to dollar-cost averaging in an investment context - you're smoothing your exposure to market timing risk.
This approach requires working with a supplier or origination professional who can structure flexible arrangements and execute additions to your fixed position efficiently as market conditions develop. It's not right for every buyer, but for mid-to-large C&I customers with significant energy spend, it's often the most rational risk management approach.
Digby Ferrara is Director of Energy Services at Aggressive Energy in Brooklyn, NY, specializing in power and natural gas origination. He works with commercial and industrial customers across the PJM footprint on electricity and gas procurement strategy, supply structuring, and risk management. Contact Digby to discuss your energy procurement.