Fixed vs. Index vs. Block-and-Index Electricity Contracts

The three structures, defined

In a choice state your electricity bill has two halves: delivery, which the utility charges under a tariff, and supply, which you can buy from a competitive supplier. The page on what energy deregulation is covers the split. This page is about the shape of the supply contract.

Fixed price. The Pennsylvania PUC defines a fixed price as an all-inclusive per kWh price that will remain the same for at least three billing cycles or the term of the contract, whichever is longer [pa-puc-electric-terms]. Maryland's PSC shopping site puts it more simply: a price that remains the same for a set period of months or years [md-electric-choice-glossary]. You pay one number per kWh and the supplier carries the market.

Index (variable). The PA PUC defines a variable price as an all-inclusive per kWh price that can change, by the hour, day, month, etc. according to the supplier's disclosure statement [pa-puc-electric-terms]. Index pricing ties the product's price to a specific index, such as the NYMEX, hourly prices in the wholesale market, or even a utility's price to compare [papowerswitch-glossary]. For a commercial account the index is usually the ISO's locational marginal price, which PJM defines as the marginal price for energy at the location where it is delivered or received, expressed in dollars per megawatt-hour [pjm-glossary]. PJM runs a day-ahead market, a forward market in which hourly LMPs are calculated for the next day, and a real-time market, a spot market in which prices are calculated at five-minute intervals based on actual grid conditions [pjm-energy-markets]. An index contract passes one of those to you, plus a fixed adder for the supplier's margin and the non-energy components.

Block-and-index. A hybrid. You buy a stated quantity of power, in megawatts for a defined set of hours and a defined term, at a fixed price, and the rest of your consumption is settled at the index. A block can be on-peak only, off-peak only, or around the clock, and the term can be a month, a season, or years. If you use more than the block in an hour, the extra is bought at index; if you use less, the unused portion is sold back at index. You choose how much of your load to fix, and when.

The rest of the supply price is the same under all three: capacity, transmission, ancillary services, renewable portfolio charges, losses, and the supplier's margin. PJM defines ancillary services as the services that help balance the transmission system as it moves electricity from generators to consumers, run through markets for reserves and regulation [pjm-glossary], and a capacity resource as a generating unit, demand resource, energy efficiency resource, or aggregate resource that has obligated itself to deliver or reduce load whenever PJM determines it is needed [pjm-glossary]. You pay for both whether you notice or not; the contract decides whether the price of them is fixed or floats.

Risk profiles: who is holding what

	Fixed	Index	Block-and-index
Energy price risk	Supplier	You	Shared; you hold it on the unblocked volume
Volume risk (you use more or less than expected)	Usually you, through swing or bandwidth clauses	You, but at market, so no penalty	You, but the block settles at index so there is no bandwidth penalty
Timing risk (you sign at a market high)	You, for the whole term	None; you ride the market down	Partial; you can layer blocks in over time
Budget certainty	High, subject to pass-throughs	Low	Medium, and adjustable
Cost of the structure	Highest; the supplier prices in a risk premium	Lowest; margin only	Between the two
Effort to manage	Sign and forget	Watch the market monthly	Watch the market and make decisions

Two points that the table hides.

First, the risk premium on a fixed contract is real money. A supplier fixing your price for 24 months has to hedge in the forward market, hold collateral, and cover the chance that your load shape drifts. All of that is priced into the number, and it goes up when the market is volatile, which is also when you most want to fix. Operators who sign a fixed contract in a panic during a price spike are paying the highest premium for the least benefit.

Second, index contracts are not reckless by definition. They are the structure that large industrial buyers with flat loads use most, precisely because a flat, predictable load is the easiest to buy at market. The problem is not the structure but the balance sheet behind it: an index contract needs a buyer who can absorb a bad month without missing payroll.

Which fits a cannabis load shape

An indoor cultivation facility's load is unusual in two ways that matter here.

It is flat and tall. In the Northwest Power and Conservation Council's producer survey, lighting was 66 percent of electricity use and flowering rooms 49 percent [nwpcc-cannabis]. A flower room draws its full lighting load for 12 hours and its HVAC and dehumidification load for 24. A facility with rooms on staggered photoperiods draws nearly the same kW every hour of every day. Suppliers love that shape; there is no volume forecast risk to price in, and a block sized to the base load covers most of the kWh. See peak demand vs. peak usage for why shape matters more than total.

It is inelastic. You cannot turn the lights off when the hourly LMP spikes to 500 dollars a megawatt-hour on a July afternoon. A steel mill or a data center on an index contract may curtail; a flower room in week six cannot. That makes fully floating exposure more dangerous for a grower than for other flat-load buyers.

Put those together and the typical fit looks like this. Facilities with tight margins, a lender, or a single site: fixed, or block-and-index with a large block, 70 to 90 percent of expected volume. Facilities with several sites, a treasury function, and the ability to layer purchases over time: block-and-index with blocks added when forward prices dip. Fully index: only when you can genuinely absorb a doubled bill for a season, and usually paired with a trigger right to fix.

Extraction labs and dispensaries look different. Extraction loads are batchy, which raises volume risk and argues for index or a small block; dispensary loads are small and daytime-heavy, which is the most expensive shape to fix. See extraction facility energy loads and dispensary retail energy costs.

Pass-throughs: the fine print that changes the structure

A fixed price is fixed for the components the contract says are fixed. Almost every commercial supply agreement reserves the right to pass through changes in some or all of the following:

• Capacity. In PJM, NYISO, and ISO-NE, your share of the capacity cost is set by your draw during the region's peak hours and reset every year. A contract that fixes energy but passes through capacity leaves you exposed to a number you can only influence by curtailing at the right five hours of the summer.
• Transmission and network charges. ISO and utility transmission rates change with rate cases and can be passed through.
• Ancillary services and losses. Small individually, but they float.
• Renewable portfolio standard compliance. Set by state law and passed through when the obligation changes.
• Change in law and regulatory charges. A catch-all that lets the supplier reprice if a regulator changes something.
• Load shape and bandwidth. If your usage falls outside a band, often plus or minus 10 to 25 percent of the forecast, the supplier reprices the difference at market. Building out a new room mid-term can trigger it.

Ask for the price in components, not as one number. A quote of 8.2 cents per kWh that fixes energy, capacity, and transmission is a different product from 7.9 cents that fixes energy only, and in a year when capacity prices jump the cheaper quote costs more. The contract terms page covers termination and evergreen clauses, which interact with pass-throughs when you try to leave.

A worked comparison

Every number here is an input we chose to make the arithmetic followable. Market prices, adders, and premiums vary by ISO, by month, and by supplier, and yours will differ.

Facility (assumed): an indoor cultivator in Ohio using 400,000 kWh a month, 4.8 million kWh a year, with a nearly flat 550 kW average draw. Ohio's June 2026 average commercial price, delivery and supply combined, was 13.77 cents per kWh [eia-epm-5-6-a]; this example concerns only the supply half, so treat the totals below as the supply portion of the bill.

Market (assumed): the average day-ahead LMP over the year turns out to be 4.5 cents per kWh, but the twelve monthly averages range from 3.2 cents in April to 8.5 cents in July. Non-energy components (capacity, transmission, ancillary, RPS, losses) come to 2.2 cents per kWh and are treated the same in all three cases.

Offers (assumed):

Structure	Terms
Fixed	7.4 cents per kWh all-in, 12 months. Energy component implied at 5.2 cents, which is the 4.5 cent expected market plus a 0.7 cent risk premium.
Index	Day-ahead LMP plus 0.3 cents margin, plus 2.2 cents non-energy.
Block-and-index	A 450 kW around-the-clock block, about 80 percent of volume, fixed at 4.8 cents energy (a smaller premium because the block is flat and certain), plus the remaining 20 percent at LMP plus 0.3 cents, plus 2.2 cents non-energy on everything.

Annual result in the year the market actually averaged 4.5 cents:

• Fixed: 4,800,000 × 0.074 = 355,200 dollars.
• Index: 4,800,000 × (0.045 + 0.003 + 0.022) = 336,000 dollars.
• Block-and-index: block volume 3,840,000 kWh × (0.048 + 0.022) = 268,800; floating 960,000 × (0.045 + 0.003 + 0.022) = 67,200; total 336,000 dollars.

In an average year the index and block-and-index buyers tie and beat fixed by 19,200 dollars, which is the risk premium they did not pay.

Now the bad year. Suppose a hot summer and a gas price spike push the annual average LMP to 6.8 cents, with July and August at 14 cents.

• Fixed: still 355,200 dollars.
• Index: 4,800,000 × (0.068 + 0.003 + 0.022) = 446,400 dollars. The July supply bill alone is 400,000 × 0.165 = 66,000 dollars against a fixed-contract July of 29,600.
• Block-and-index: block 268,800 unchanged; floating 960,000 × (0.068 + 0.025) = 89,280; total 358,080 dollars.

The block-and-index buyer paid 2,880 dollars more than fixed in the bad year and 19,200 less in the normal year. The index buyer paid 91,200 more in the bad year, and had a single July bill more than double the fixed one. Whether your facility can write that July check is the whole decision.

Monthly view for July, bad year (supply only):

Structure	July cost	Basis
Fixed	29,600	400,000 × 0.074
Index	66,000	400,000 × (0.14 + 0.003 + 0.022)
Block-and-index	34,800	320,000 × 0.070 + 80,000 × 0.165

Run your own numbers in the supplier contract comparison worksheet. The important discipline is to model a bad year, not just the expected one.

How to choose, in practice

1. Get your hourly interval data and know your load shape. A flat shape makes blocks cheap; a spiky one makes them expensive. See interval data and AMI meters.
2. Ask every supplier for the same three structures on the same start date and the same volume, with the price broken into components.
3. Read the pass-throughs and the bandwidth clause before comparing the headline numbers.
4. Decide what a bad month costs you and whether you can pay it. That answer, not the average, sets your block size.
5. If you go block-and-index, get the trigger right in writing: how you add blocks, on what notice, at what price, and whether the supplier must quote.
6. Line the contract end date up with a season when the market is usually soft, not with your lease anniversary.

A broker who only ever shows you fixed contracts is showing you the product that is easiest to sell. The page on how energy brokers get paid explains why that happens, and energy broker vs. direct supplier covers whether you need one at all.