Block and index contracts: blocks, shapes and settlement
A block and index contract fixes the price on a set block of energy and bills the rest at index. It suits sites with a steady baseload and a variable top, and it works only if the block is sized and shaped to the load.
Megawatt blocks and percentage blocks
Suppliers use "block" for two different products.
- Megawatt blocks. A fixed number of megawatts in every hour of a defined shape. Usage above the block is bought at index; if usage falls below the block, the unused energy is sold back at index.
- Percentage blocks. A fixed share of each hour's actual usage, such as 70 percent, at the fixed price, with the rest at index. Nothing is sold back, so the risk is lower and the price is usually higher.
Block shapes
Megawatt blocks are sold in standard shapes taken from wholesale markets:
| Shape | Hours covered | Fits |
|---|---|---|
| Around the clock (7x24) | Every hour of every day | Continuous processes, cold storage, data centers |
| On-peak (5x16) | Sixteen daytime hours on weekdays | Single- and double-shift operations |
| Off-peak | Nights, weekends and holidays | Sites with night or weekend production |
| Custom shaped | Any defined pattern | Sites with an unusual but predictable profile |
Exact on-peak hours and holiday rules differ by market and supplier.
How settlement works
| Usage in the hour, against a 2 MW block | At the block price | At index |
|---|---|---|
| 3 MW | 2 MW | 1 MW bought at index |
| 2 MW | 2 MW | None |
| 1.5 MW | 2 MW | 0.5 MW sold back at index |
When usage falls below the block and the index is below the block price, the energy sold back earns less than it cost. When the index is above the block price, it earns more. A block sized above the real baseload turns every slow hour into a sale at whatever the market pays.
Sizing the block
- Pull at least 12 months of interval data for each site.
- Find the load the site reaches in nearly every hour of the shape you are buying, not the average.
- Allow for planned changes: new lines, shutdowns, holidays and seasonal swings.
- Size the block at or below that level, and leave the rest at index or layer more blocks later.
Market differences
- PJM and NYISO. Capacity and transmission are usually handled separately from the block, either fixed or passed through. The block covers energy.
- ERCOT. Blocks often sit alongside a real-time index on the remainder; ancillary services may be fixed or passed through.
- Natural gas. The block is a fixed daily quantity in dekatherms, with swing volumes priced at a daily or monthly index.
Terms to read before signing
- MW or percentage block, and the exact hours in each shape
- Which index prices the remainder and the sell-back
- Whether a sell-back carries a discount or fee
- Whether blocks can be added during the term, and how they are priced
- Which charges are fixed with the block and which are passed through
How block and index shows up on the bill
A block and index invoice usually has at least three energy lines: the block volume at the fixed price, volume bought at index above the block, and a credit or charge for volume sold back below the block. Many suppliers add a monthly reconciliation statement that shows the hourly calculation.
- The block line should show the same megawatts in every hour of its shape, regardless of usage.
- The sell-back line should be priced at the index named in the contract, less any stated fee.
- Blocks added during the term appear as separate lines at their own prices; check each one against its confirmation.