In U.S. utility markets that allow customers to choose their electricity supplier in a similar manner as Japan, procurement practices are very different than in Japan.
For comparison to Japan, two US markets, Texas and Pennsylvania were selected. Both are like Japan’s liberalized market model. The percentage of customers who have switched from their utility supplier to a retailer is 100% in Texas and 95% in Pennsylvania. This includes U.S. subsidiaries of Japanese multinationals.
The most common U.S. large customer (extra and high voltage) power procurement methods are as follows.
Price risk hedging methods provided by retailers to customers
- Fixed price for the entire demand for 1,2, or 3 years.
- Fixed price for a fixed volume the customer knows they will need with the balance of demand volume priced monthly.
a.This is called a Block & Index hedge.
b.The variable price typically uses either the spot market or an independent publication. - Managed hedging is when the customer locks in fixed prices for a portion of their demand at various times over several years.
a.Typically, a high percent for the coming calendar / fiscal year, and lower percentages for the outer years.
Most large U.S. corporates have in place risk guidelines, mandating the minimum percentages to be hedged. These guidelines apply to not just power procurement but to any commodity purchase that can impact the company’s financial results.
In the early days of U.S. power market liberalization large customers tended to remain with their utility. Because utilities pass through price risk to customers (fuel cost adjustment or rate case with regulators), customers could not manage the price volatility that is common with commodities. This ability to manage price risk is why large U.S. customers have switched to retailers.
Top 5 Reasons Large U.S. Customers Hedge Electricity
- To achieve price certainty for budgeting and profit loss management
- Because they cannot pass thru short-term price spikes to their customers
- Hedging energy meets internal risk management standards
- To eliminate or reduce the impact of fluctuating energy prices
- Shift price volatility risk to the retail supplier
