Short Answer
A 5 MW manufacturing facility should use a layered procurement strategy: start indexed, hedge in 20–25% tranches as the market offers favorable pricing, and maintain 20–30% indexed for flexibility. Avoid the two most common mistakes—locking everything in on a single day, and doing nothing until the contract expires.
Know Your Costs First
Before making procurement decisions, understand what you’re paying for. A typical 5 MW bill breaks down into several components:
- Energy (commodity), 40–60% of total cost: The cost of electrons, driven by wholesale prices. This is the component you control through procurement.
- Capacity, 15–25%: Based on your peak demand during system peaks. In PJM, capacity costs surged 8–10x between the 2024/2025 and 2025/2026 delivery years. Managing your capacity tag is critical.
- Transmission and distribution, 15–25%: Delivery charges that are largely passed through. Peak load management can reduce your allocation.
Even a perfect commodity strategy only controls part of the equation. Load management and peak demand reduction matter just as much.
The Hedging Plan
|
Timing |
Action |
Cumulative Hedge |
|
Month 1–2 |
Start on index. Monitor forward curves for entry points. |
0% |
|
Month 3–4 |
First tranche: lock in 25% if forwards dip below target. |
25% |
|
Month 5–7 |
Second tranche: add 20–25% if conditions are favorable. |
45–50% |
|
Month 8–10 |
Third tranche: bring total to 60–75%. |
60–75% |
|
Ongoing |
Maintain 25–40% indexed. Hedge more only on exceptional pricing. |
60–75% |
Common Mistakes
- The “one big lock”: Locking your full load on a single day is market timing at its worst. If that day is a high point, you’re stuck for the full term. Layered hedging eliminates this risk.
- Ignoring capacity costs: A facility paying $35K in capacity in 2023 may now pay $300K+ for the same demand allocation. Manage your peak demand, not just your commodity rate.
- Emotional reactions to spikes: Hedging into a price spike locks in the elevated pricing. A disciplined plan with predefined triggers prevents reactive decisions.
- No advisory support: At 5 MW, most facilities don’t have a full-time energy manager. An external advisor provides market intelligence and strategic framework.
Bottom Line
The right strategy can save a 5 MW facility $150,000–$300,000 annually compared to a naive fixed lock or unmanaged index. The key is discipline: hedge in layers, manage capacity, and work with an advisor who watches the market so you don’t have to.
Frequently Asked Questions
What is the best energy procurement strategy for a manufacturer?
For most mid-sized manufacturers (3–10 MW), layered hedging works best: start indexed, hedge in 20–25% tranches over time, and maintain some indexed exposure for flexibility.
How much can a 5 MW facility save with better procurement?
Savings of $150,000–$300,000 annually are realistic, depending on market conditions. The savings come from avoiding the risk premium in fixed contracts and timing hedges to favorable conditions.
What are capacity costs and why do they matter?
Capacity costs are charges based on your facility’s peak demand contribution. In PJM, these have surged to levels where a 5 MW facility may pay $250K–$400K annually. Reducing peak demand during system peaks can significantly lower this cost.