A Block & Index product combines the attributes of a fixed price or heat rate along with some degree of LMP Index and has become a common product structure since the advent of deregulated electricity markets. Rather than committing to a fixed price for all of a client’s consumption, a Block & Index contract captures a fixed price or a heat rate formula for a specified portion of the client’s consumption, while the remainder is priced at the applicable LMP index. The contract price is a formula of a block price combined with the LMP index price plus a fixed retail adder.
A potential benefit of the Block & Index product is that a client does not explicitly pay for an imbedded risk premium to cover the cost of shaping wholesale block energy to retail energy consumption. However, this shaping will be achieved via the index priced portion of the client’s consumption, thereby making the client open to the unknown risk of LMP price spikes. Some retail energy suppliers prefer to sell the Block & Index product in order to transfer this shaping risk from them to the client.
One other feature of a Block & Index product is the ability to capture fixed price or heat rate blocks during the contract term. A client can begin a contract period with an unhedged position originally priced at the LMP index and later lock in a fixed price or heat rate via a price hedge at some point after the contract commences. Power Connection monitors the market and advises our Block & Index clients when the opportunity is right to capture a price hedge.