Index energy pricing: day-ahead, real-time and variable rates
An index contract bills energy at a published wholesale price plus an agreed adder. You pay what the market pays, with no premium for price protection and no protection from spikes. Which index, at which location and over which interval decides what the bill actually follows.
Which index
| Index | How it is set | What it means for the bill |
|---|---|---|
| Day-ahead hourly | Prices cleared the day before for each hour | Known a day in advance; usually less volatile than real-time |
| Real-time | Prices calculated every few minutes as the grid runs, settled in short intervals | Most volatile; reflects actual grid conditions, including scarcity |
| Monthly average | An average of hourly prices for the month | Smoother, but still follows the market month to month |
| Supplier variable rate | A monthly rate the supplier sets, tied to no published index | Often what a contract rolls onto at expiry; can sit well above market |
Which location
Wholesale prices differ by location. A contract may follow a trading hub, a utility zone or load zone, or the specific node where your power is delivered. The difference between hub and zone prices, called congestion or basis, can be large when transmission is constrained. In ERCOT, retail index contracts usually follow one of the load zones, such as Houston, North, South or West. In PJM and NYISO, they usually follow the utility zone.
What the adder covers
The adder is the supplier's fixed charge on top of the index, per kWh. In one offer it covers only the supplier's margin. In another it also covers capacity, ancillary services, line losses and grid operator fees. A lower adder that excludes those charges can cost more than a higher adder that includes them.
| Item | Inside the adder? | If not, how it is billed |
|---|---|---|
| Supplier margin | Always | — |
| Line losses | Sometimes | As a percentage added to usage |
| Ancillary services and grid operator fees | Sometimes | Per MWh at settled cost |
| Capacity | Sometimes, in capacity markets | Tag times capacity price |
| Transmission | Rarely | Tag times network rate, or on the utility bill |
| Renewable compliance | Sometimes | Per MWh at certificate cost |
The risk to plan for
Index pricing passes scarcity straight to the bill. In ERCOT, real-time prices can reach the market's offer cap of $5,000 per MWh during emergencies, as they did for days during Winter Storm Uri in February 2021. In capacity markets, summer and winter peaks can push hourly prices to many times their average. A budget on index needs a reserve for those hours, a plan to reduce load when they come, or a partial hedge.
Index suits buyers who can absorb variance, who can move load away from high-price hours, or who are waiting for a better moment to fix. Many buyers combine it with a fixed block; see block and index.
Natural gas index pricing
Gas index contracts usually follow a monthly first-of-month index at the delivery point, set during the last week of the prior month, or a daily index for swing volumes. The NYMEX Henry Hub futures price plus basis to the local trading point is the reference. See natural gas: NYMEX and basis.
Terms to read before signing
- The index by name, location and interval
- Exactly what the adder includes
- How line losses are applied
- Whether you can convert part or all of the volume to fixed during the term, and how it is priced
- Credit and payment terms, which matter more when bills swing
How index pricing shows up on the bill
Most index bills show a single blended energy rate for the month, calculated from the hourly or interval prices weighted by your usage, plus separate lines for the adder, losses and any passed-through charges. The hour-by-hour calculation sits in a separate settlement report. Ask for that report every month; without it, the blended rate cannot be checked, and a wrong zone, a wrong loss factor or usage from the wrong meter is invisible on the bill.
- Check that the index named on the bill matches the contract: day-ahead or real-time, and the right zone or hub.
- Check that usage in the settlement report matches the utility's interval data for the same meter.
- Check the adder and loss factor against the contract.