Index Pricing is a wholesale rate that rides the market. It is for commercial customers who are willing to take on more risk in order to maximize savings.
Historically, index rates have been the lowest cost plans over time. So why doesn’t everyone sign up for them? The reason is because index rates constantly fluctuate with the market which carries the risk that price spikes may occur.
For example, in August 2011 a spike occurred. One of our providers’ index rates that month was 12.722 cents/kWh, but the price dropped to 3.335 in September and then to 2.728 in October. That is a rate less than 3 cents! In fact since index rates are wholesale, it is common that they stay between 2.5 & 3 cents/kWh. The average index price in 2012 with this provider was 2.538 cents/kWh. But due to the price spikes in 2011, the average that year was higher at 4.3 cents/kWh. But 4.3 cents/kWh is still a great rate!
So, the question that needs to be asked is: “Could your business easily handle an increase of double or triple energy rates on your electric bill for a short time, or would it be a strain?”
Index products also have an “Adder” charge which covers the cost of servicing your electricity account. When you request an Index quote, you will receive a quote for the adder along with what the market rates have been in recent months. The quote will be for contracted terms just like fixed products. The contracted terms allow you to avoid any added premiums due to the risk that you might switch away. However, most REPs will allow you to change from an index plan to a fixed rate at any time for the remainder of your contract term.
If maximum savings at the expense of risking occasional high bills appeals to you, index is likely to be the best plan for your company.