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Fixed vs. index pricing | The Outlet — Pilot Energy

Written by Pilot Energy | May 26, 2026 4:22:31 PM

On a napkin

$/MWh Fixed: $68 Index below fixed — buyer regrets locking in Index above fixed — buyer glad they locked in Year 1 Year 2 Year 3

The short version

Every large electricity buyer faces the same core procurement decision: lock in a fixed price for certainty, or ride the index and accept price volatility. Neither is universally better. The right answer depends on the forward curve, your organization's risk tolerance, your ability to absorb bill volatility, and your view on where prices are headed.

A fixed price contract sets a flat $/MWh rate for a defined term — typically 1 to 5 years for C&I buyers, 10–25 years for large industrial or PPA structures. You know exactly what you'll pay. You give up the upside if market prices fall below your locked rate, but you're protected if they spike above it. A index price contract passes the wholesale market price through to you — often with a small adder for the retail supplier's margin and cost to serve. You capture market lows but are fully exposed to spikes.

The forward curve is priced in: A fixed price set today already reflects the market's expectation of future prices. If you lock in at $65/MWh and the market expects $65/MWh, you're not getting a discount — you're paying for certainty. The question is whether that certainty is worth the cost of the risk premium embedded in the fixed price.

When fixed pricing makes sense

Fixed pricing is appropriate when price certainty has high organizational value — budget-sensitive operations, thin-margin businesses where energy is a significant cost, or organizations that cannot manage the volatility of index pricing in their P&L. It also makes sense when the forward curve is backwardated (future prices below current spot) and you believe the curve is correct, or when market conditions suggest significant upside price risk that you want to avoid.

When index pricing makes sense

Index pricing is attractive when the forward curve carries a risk premium above expected spot prices — meaning fixed rates are expensive relative to where spot is likely to trade. Organizations with flexible loads that can reduce consumption during high-price periods can effectively self-insure against index spikes. Large buyers with multiple facilities can average index exposure across a portfolio, reducing single-site volatility.

Hybrid structures

Most sophisticated buyers don't choose all-or-nothing. Block and index structures hedge a base load at a fixed price while leaving incremental load on the index. Collars cap upside exposure while retaining some downside participation. Layered procurement builds the hedge over time — fixing portions of future load at different times — reducing timing risk on the fixed price decision itself.

Common questions

What is the difference between fixed and index electricity pricing?
A fixed price contract sets a flat $/MWh rate for a defined term — providing cost certainty but no participation in market price decreases. An index price contract passes the wholesale market price through to the buyer — providing exposure to market lows but full vulnerability to price spikes. The choice depends on risk tolerance, budget sensitivity, load flexibility, and the buyer's view on market direction.
When should a large energy buyer choose a fixed price?
Fixed pricing makes sense when price certainty has high organizational value, when the business has a thin operating margin where energy cost volatility would be disruptive, or when the forward curve suggests significant upside price risk the buyer wants to avoid. It's also appropriate when budget predictability is valued more than expected cost savings from index participation.
What is the risk premium in a fixed electricity price?
A fixed electricity price includes a risk premium — compensation to the retail supplier for absorbing market price risk. If the market expects $60/MWh, the fixed offer might be $64/MWh — the $4 spread is the cost of certainty. Buyers paying this premium are implicitly purchasing insurance against price spikes. The premium varies with market volatility and forward curve shape.
What is a block and index electricity procurement strategy?
A block and index strategy hedges a portion of load at a fixed price (the block) while leaving incremental load to float with the index. This provides baseline cost certainty while retaining some market participation. It is appropriate for buyers who want protection against worst-case scenarios but believe index prices will be favorable on average. The block size is typically set at the buyer's minimum guaranteed load.
What is layered procurement for electricity?
Layered procurement builds a fixed price hedge incrementally over time — buying portions of future load at different price points rather than fixing the entire volume at once. This reduces timing risk: instead of locking in the entire year's load in one transaction (and potentially at a peak in the forward curve), the buyer averages into the hedge over months or quarters. Layering is standard practice among sophisticated large industrial buyers.

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