What is Index?

What is Index?Category: QuestionsWhat is Index?
Jamie M Staff asked 5 years ago
1 Answers
Jamie M Staff answered 5 years ago

Although Retail Energy Suppliers can offer many product options to businesses considering energy supply, the two most common options that most suppliers carry are fixed all-in and index supply. Fixed all-in and index energy supply are the standard options that will meet the needs of most businesses looking to take control of their energy spend.
What is index?
An index price/product means that the rate a business receives for their energy is directly based on market conditions. As the energy market is a tradable market, the market price for energy is constantly changing as supply and demand fluctuate. Due to these fluctuations, the index price on a businesses’ energy bill will cause the energy supply portion of the bill to vary month to month as well.
Energy bills are made up of three sections:

  1. Energy supply
  2. Energy delivery
  3. Taxes & Other

Deregulation allows businesses to control the energy supply portion of their bill by giving them the ability to select different product types and rates from Retail Energy Suppliers. 
Monthly usage varies as the amount of energy that a business uses will vary. In addition to this movement, the rate that a business will pay on an index plan will also change. The formula for a business that is using an index energy supply looks like this:
(fluctuating) index rate x (fluctuating) monthly kWh = energy supply $
As you can see from the above formula, an index rate will change the amount a business pays month to month because the energy market is changing month to month. This combined with the fluctuations in a businesses’ energy usage mean that both parts of the formula are fluid.
What are the benefits?
Businesses with a greater risk tolerance can take advantage of the flexibility an index plan offers as this type of product can allow a business to capitalize on a market that is trending down. A business can, therefore, capitalize on market lows by fixing a long-term rate when the opportunity presents itself. Along with flexibility, an index plan can be more economical as businesses are not paying a premium usually built into a fixed price due to price certainty.
What are the negatives?
If the market moves up and energy prices rise, a business with an index rate will see the cost of their energy bill rise. This volatility can cost a business a lot of money and is hard to predict.
Who should consider index plans?
Businesses with high risk tolerance that are looking to take advantage of a downward moving market are good candidates for an index product. Also, businesses that are not yet ready to lock into a fixed plan due to high market prices and would rather ride out the market until more favorable fixed prices are made available.