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Long-Term Power Contracts: The Art Of The Deal

Long-Term Cooperative Supplier Relationships
Fortnightly Magazine - August 2004

if a price premium exists for longer contracts, the New Jersey results indicate that the price premium is small and is likely outweighed by the benefits (price stability) that parties receive through use of a laddered approach.

While customer migration risk is a legitimate concern in determining contract prices in the context of a default service auction, the prospects for significant residential switching in the next 5-year time frame are quite small. Furthermore, any risk that this might impose can be mitigated through the use of a laddered procurement approach, wherein for each year, only a fraction of the default service load is procured.

Endnotes

  1. Wellman, Allen C., "Hog Cash Contracts Advantages and Disadvantages," Nebraska Cooperative Extension NF 96-280, http://www.ianr.unl.edu/pubs/farmmgt/nf280.htm.
  2. Martha Neustadt of Intel Corporation's Materials Department. Personal communication, 5/21/2003.
  3. Market rules and definitions of capacity and ancillary products are a concern in this regard, but appear to be becoming more stable; electric energy as a commodity delivered to market is, for purposes of this discussion, reasonably stable in definition.
  4. Dyer, Jeffrey, "How Chrysler Created an American Keiretsu," , July-August, 1996, 42-56.
  5. http://story.news.yahoo.com/news?tmpl=story&cid=568&ncid=749&e=4&u=/nm/20040412/bs_nm/markets_coffee_prices_dc .
  6. In the rapidly evolving cellular phone market, discount offers that are conditional on a long-term contract may reflect the vendor's strategic expectations about competitive entry and not just the benefits of risk sharing. Buyers in such markets should obtain and use similar strategic intelligence.
  7. See, for example, William B. Marcus and Greg Ruszovan . JBS Energy, Inc. Dec. 5, 2000. This study analyzed the market price of electricity in the PJM region in order to determine the value of photovoltaic (PV) load reduction. The estimated value of PV load reduction during the on-peak hours during that summer season was over 27 cents/kWh in the PJM (4.8 times the market price calculated) and roughly 8.1 cents/kWh during summer mid-peak hours. PV's summer on-peak load reduction value may very well be equal to or exceed the levelized cost of electricity from PV panels. This effect is thought to be especially pronounced in unhedged markets.
  8. The 2003 auction contract lengths were 10 months and 34 months to permit synchronization with PJM's power planning periods.

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