Know your costs first
Before making procurement decisions, understand what you're actually paying for. A typical 5 MW manufacturing bill breaks down into three components, each with different drivers and different leverage points:
| Component | Share of bill | What drives it | What you can do |
|---|---|---|---|
| Energy (commodity) | 40–60% | Wholesale prices, forward curves, fuel costs | Procurement strategy (hedging, layering, timing) |
| Capacity | 15–25% | Peak demand contribution during system peaks | Peak load management; DR participation |
| Transmission & distribution | 15–25% | Utility tariffs; coincident peak allocations | Mostly pass-through; some peak-time reduction |
A perfect commodity strategy only controls 40–60% of the equation. Capacity in particular has surged: in PJM, capacity costs jumped 8–10× between the 2024/25 and 2025/26 delivery years. A facility paying $35K in capacity in 2023 may now pay $300K+ for the same demand allocation. Managing your capacity tag isn't optional.
The hedging plan
Don't try to time the bottom. Execute on a schedule with predefined trigger prices. A typical 8–10 month layered hedging plan for a 5 MW manufacturer:
| 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% |
The mechanics are covered in more depth in Hedging 101. The key point: the discipline of executing in tranches matters more than the absolute price you hit. A facility that hedges methodically on schedule consistently outperforms one trying to time the bottom.
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 in the curve, you're stuck at that price for the entire term — often 24 months or longer. Layered hedging eliminates this risk by averaging your effective price across multiple market conditions.
Ignoring capacity costs
A facility paying $35K in PJM capacity in 2023 may now pay $300K+ for the same demand allocation. The commodity rate has nothing to do with this — capacity is a separate line. Manage your peak demand, not just your commodity rate.
Emotional reactions to spikes
Hedging into a price spike locks in elevated pricing. A disciplined plan with predefined trigger prices prevents reactive decisions — you hedge because the price hit your target, not because the news cycle made you nervous.
No advisory support
At 5 MW, most facilities can't justify a full-time energy manager. But the spend — typically $1.5M–$3M annually in PJM — is large enough that strategy matters. An external advisor provides the market intelligence and operational framework that a one-person finance or operations team can't maintain alone.
$150K–$300K
typical annual savings for a 5 MW manufacturer using layered hedging + capacity management vs. naive fixed lock or unmanaged index
What good looks like for a 5 MW facility
The procurement function for a well-run 5 MW operation has a few defining characteristics:
- A written hedging plan — tranche sizes, trigger prices, and timing windows documented before market conditions are evaluated. Not a verbal "we'll hedge when it looks good."
- Capacity tag tracking by season — you know what hours of the year set your tag, you know what your tag is now, and you know what would change it.
- Monthly variance analysis tied to specific drivers — when the bill goes up or down, you know whether it was commodity, capacity, or T&D — and which line item to address.
- Forward visibility 12–18 months out — what contracts are expiring, what positions are open, what triggers haven't been hit yet.
Bottom Line
A 5 MW facility's energy strategy isn't about picking the right rate — it's about disciplined execution across three different cost categories. Hedge in layers against trigger prices. Manage your capacity tag like it matters (because it does). Treat the procurement function as a 12-month process, not an event. Done well, the savings are $150K–$300K annually compared to the alternative — which is what most mid-sized manufacturers pay because they think strategy is for bigger operations.
