Energy procurement specialists rely on several strategies to help businesses manage energy costs effectively. Index pricing is a tactic that can provide significant savings. However, the move is not without certain risks.
Also known as variable or market-based pricing, index pricing ties energy costs directly to real-time market rates. This approach can generate cost savings and provide increased flexibility. Technological advancements, regulatory changes, and global economic trends influence the energy market, which makes understanding the nuances of different procurement strategies critical.
Index pricing requires thoroughly evaluating an organization’s energy needs, risk tolerance, and long-term objectives.
Understanding energy procurement price indexing
Index pricing is a dynamic approach to energy procurement that directly links your energy costs to real-time or day-ahead market rates. This strategy allows energy prices to fluctuate based on the current market conditions, reflecting the immediate balance between supply and demand.
“An index strategy offers both opportunities and risks for energy users,” said Brian Choquette, Kobiona Managing Partner. “While it eliminates risk premiums and provides access to wholesale prices and low spot market rates for much of the year, it also introduces higher price volatility, reduced budget certainty, and exposure to seasonal spikes, particularly during harsh New England winters.”
Choquette recommends organizations review their load profiles to evaluate seasonal usage trends to determine if an index strategy suits their energy management needs. “Businesses with high winter usage consumption may find index products less favorable than those with peak usage in milder seasons like spring or fall,” he said.
How index pricing works
At its core, index pricing is a mechanism that aligns your energy costs with the ebb and flow of the wholesale energy market. Unlike fixed-rate contracts that offer price certainty, index pricing provides a more flexible approach to energy procurement.
Understanding these mechanics is crucial for businesses considering this strategy, as it forms the foundation for evaluating potential benefits and risks.
- Market-based rates. Unlike fixed-price contracts, index pricing doesn’t lock in a set energy rate. The price businesses pay changes frequently—sometimes hourly or daily—based on wholesale market prices.
- Price components. An index price typically consists of two main elements: the market index (NYISO, PJM, ERCOT) and a fixed adder that covers supplier costs and margins.
- Real-time vs. day-ahead markets. Index pricing is tied to either real-time markets or day-ahead markets. Real-time markets involve frequent price changes throughout a 24-hour cycle, while day-ahead pricing establishes energy costs a day in advance.
“It’s important to note that locking in 100% of a forward strip historically results in higher costs compared to the index settlement,” said Choquette. “However, past performance does not guarantee future results, so decisions should be tailored to your specific risk tolerance and operational needs.”
Advantages of index pricing
Businesses interested in optimizing their energy procurement strategies may find that index pricing offers several compelling benefits. Since the approach directly ties energy costs to market rates, it provides some advantages in terms of cost management, market insight, and operational flexibility.
Cost savings and flexibility
Over time, index energy costs have historically been lower than fixed costs, primarily because of the absence of supplier risk premiums. Fixed-rate contracts typically include premiums to protect suppliers against potential market fluctuations. Index pricing removes these premiums, allowing consumers to access wholesale rates directly.
Index pricing also allows businesses to benefit from periods of low market prices, which can offset occasional price spikes.
Transparency and market access
Index pricing offers unparalleled transparency, allowing consumers to see exactly how market conditions affect their energy costs. This direct market access can be particularly beneficial for businesses with the flexibility to adjust their energy consumption based on price signals.

Price indexing potential risks and considerations
While index pricing can offer significant benefits, businesses must carefully evaluate the associated risks before adopting this strategy. Index pricing exposes organizations to potential market fluctuations that can cause sudden price spikes.
This volatility can surface in several ways:
- Short-term spikes. Unexpected events, such as extreme weather or supply disruptions, can cause a rapid and significant price increase.
- Seasonal patterns. Energy prices often follow seasonal trends, with higher prices during peak demand periods. Businesses in New England typically see higher energy usage during the hottest times of summer and the coldest periods of winter.
- Market sensitivity. Index prices react quickly to changes in supply and demand, geopolitical events (such as the Russian invasion of Ukraine), and other economic factors.
Budget uncertainty
The fluctuating nature of index pricing may pose challenges for businesses with strict budget requirements. Budget-conscious organizations often find it challenging to accommodate the potential swings in energy costs associated with this energy management strategy.
- Predicting energy costs makes forecasting difficult, which in turn affects accurate budget planning.
- Spiking energy prices can strain cash reserves and disrupt cash flow management.
- Managing low risk tolerance can be unsettling with the potential for cost variability.
Seasonal spikes
In regions like New England, harsh winters can lead to significant price increases, potentially affecting businesses with high winter energy consumption.
This risk is particularly pronounced in areas with:
- Limited energy infrastructure. Regions with constrained supply routes may experience more severe price spikes during high-demand periods.
- Climate-sensitive demand. Areas prone to extreme weather events can see dramatic shifts in energy demand and pricing.
- Seasonal business operations. Companies with higher energy needs during winter months may face disproportionate risk.
These seasonal factors can exacerbate the inherent volatility of index pricing, potentially leading to substantial cost increases during critical operational periods.
“The prolonged cold in January has significantly driven up natural gas prices, which in turn has increased the cost of spot market (index) electricity,” said Choquette. “For long-time users of index strategies, this type of market behavior is expected and factored into their planning. However, for commercial and industrial customers new to index strategies, entering the market during a high-cost period can be particularly challenging.”
Energy policy’s impact on index pricing
The Trump Administration’s energy policies are likely to significantly impact index pricing strategies for energy procurement. In his first week in office, President Trump signed an executive order to boost domestic fossil fuel production, including oil and natural gas.
This push for increased production could lead to increased supply, which could drive down wholesale energy prices to potentially benefit businesses using index pricing strategies. Greater domestic production could also stabilize energy markets, potentially decreasing the risks associated with index pricing.
Rollback on renewable energy initiatives
The administration’s actions to pause wind energy development and remove incentives for electric vehicles could impact the energy market.
A decrease in renewable energy growth might lead to a greater reliance on fossil fuels, potentially affecting energy market price dynamics. However, these rollbacks could trigger long-term price implications.
While fossil fuel prices might decrease in the short term, reduced investment in renewables could lead to higher prices in the long run as the energy mix becomes less diverse.

Regulatory changes
President Trump’s national energy emergency declaration aims to expedite energy infrastructure projects and reduce the federal regulations that could slow them down. Faster project approvals could lead to quicker development of energy projects, potentially increasing supply and affecting market prices.
However, expedited approvals can lead to increased production only in certain areas, potentially creating regional price disparities.
How to choose the right energy procurement strategy
Businesses must carefully evaluate their energy procurement strategies to ensure they align with their operational needs and financial goals as the energy market evolves. The decision between fixed-rate, index-based, or hybrid pricing models requires a thorough assessment.
Given the potential for increased short-term volatility in energy markets, businesses should reevaluate their risk tolerance and ability to handle price fluctuations, suggested Choquette.
“In our view, this is not the time to chase a forward-fixed rate while enduring the immediate impact of elevated costs,” he said. Instead, Choquette said he recommends focusing on the potential for lower costs later in the year, as milder weather and seasonal trends may provide relief. “This approach ensures you don’t lock in higher rates in response to temporary market conditions, preserving the benefits of an index strategy over the long term.”
Schedule a consultation with Kobiona’s energy procurement specialists today to discuss the best energy management strategy for your business.
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