Fixed-rate vs block & index contracts in ERCOT: Which fits your business?

Core thesis

For Texas commercial and industrial (C&I) customers, the decision between a fixed‑rate contract and a block‑and‑index arrangement is less about "better" and more about aligning price certainty with risk appetite and load shape. A fixed‑rate contract delivers a single, predictable price for 100% of your electricity use, eliminating exposure to ERCOT’s real‑time price swings. A block‑and‑index contract, by contrast, lets you lock in a price for a defined portion of your load—often aligned to your peak or base demand—while the residual volume, ancillary services, and transmission charges continue to track the market. The right choice depends on your load profile, your tolerance for price volatility, and the financial controls you have in place.

Fixed‑rate contracts: budget certainty

How they work

A fixed‑rate contract is a forward agreement with a retail electric provider (REP) that specifies a single price—expressed in cents/kWh—for all electricity consumed over the contract term, typically 1 to 5 years. The price is set based on the provider’s forecast of ERCOT’s day‑ahead locational marginal price (LMP) plus an agreed‑upon margin for risk, transmission (4CP) and delivery‑charge recovery. Once signed, the price does not change, regardless of spikes in the ERCOT market, extreme weather events, or changes in ancillary service costs.

What stays floating

Even under a fixed‑rate contract, certain line items may remain variable:

• TDSP delivery charges – Oncor, CenterPoint, AEP Texas, or TNMP recover these on a per‑kWh basis and are regulated by the PUCT.
• Demand charges – Most REPs still bill a demand component (cents/kW) based on your monthly peak demand, unless a demand‑cap structure is negotiated.
• Ancillary services – If the contract does not include a bundled ancillary service fee, you may see a separate charge tied to ERCOT’s ancillary market.

When it makes sense

• Tight cash‑flow planning – Companies that need to lock in a monthly electricity budget for debt covenants or shareholder reporting.
• Low‑variance load – Facilities with a flat load factor (e.g., data centers) where the majority of consumption occurs at a steady rate.
• Risk‑averse leadership – Finance directors who prefer a predictable expense line over potential upside from market dips.

Block & index contracts: market participation with control

How they work

A block‑and‑index contract splits your consumption into two buckets:

1. Block volume – A pre‑determined quantity of kWh (or kW for demand) that is priced at a fixed index price, usually tied to the ERCOT day‑ahead LMP plus a negotiated margin. The block size is often aligned to a percentage of your historical peak or to a specific load shape (e.g., 30% of peak demand during the hottest 30 days).
2. Residual volume – All usage outside the block is settled at the real‑time market price (cents/kWh) plus the same margin for transmission and delivery.

The index component can be structured as:

• Block‑only – Fixed price for the block, residual floats.
• Block‑plus‑index – Fixed price for the block, plus a separate index price for the residual that may include a small markup.

What stays floating

• Residual consumption – Any kWh not covered by the block.
• Ancillary services – Typically settled at real‑time rates unless explicitly bundled.
• Transmission and delivery – While the block price includes a margin for 4CP transmission, the residual portion is subject to the prevailing TDSP delivery charge.

When it makes sense

• Variable load with identifiable peaks – Manufacturing plants with seasonal peaks can lock in a block that covers the high‑demand period while allowing low‑demand months to benefit from lower market prices.
• Strategic risk‑taking – Operations leaders who want to capture upside when ERCOT LMPs dip below the block price.
• Regulatory compliance – Companies that must report an Electricity Facts Label (EFL) and want to demonstrate active market participation.

Matching contract type to load size and shape

Load characteristic	Recommended contract	Rationale
Small (<500 kW) and flat	Fixed‑rate	Simpler billing, minimal admin overhead, and the $3.2 M average annual savings UPG delivers across 8,000+ customers can be realized quickly.
Medium (500 kW–2 MW) with moderate peaks	Block‑and‑index (30‑50% block)	Captures upside on off‑peak days while capping exposure during peak demand.
Large (>2 MW) with distinct seasonal peaks	Tiered block‑and‑index (multiple blocks)	Allows separate blocks for summer peak, winter peak, and base load, aligning with ERCOT’s nodal LMP volatility.
Load with high demand‑charge component	Fixed‑rate with demand‑cap or block‑only covering demand	Reduces the impact of demand spikes that can dominate the bill.

Example calculation

Assume a 1 MW facility with an average annual consumption of 8,760 MWh and a summer peak demand of 1.5 MW. A 40% block (3,504 MWh) priced at 6.5 cents/kWh (index price) versus a fixed‑rate of 7.2 cents/kWh yields:

• Block cost: 3,504 MWh × $0.065 = $227,760
• Residual cost (average market price 5.8 cents/kWh): 5,256 MWh × $0.058 = $304,848
• Total: $532,608 versus Fixed‑rate total $631,872 (8,760 MWh × $0.072) The block‑and‑index structure saves roughly 16% on energy cost, while still exposing the residual to market risk.

Risk tolerance tests and financial controls

1. Value‑at‑Risk (VaR) analysis – Model the worst‑case price swing for the residual volume over a 30‑day horizon. If the VaR exceeds your approved variance threshold, increase the block size.
2. Cash‑flow stress test – Project monthly bills under a 200 % LMP spike (as seen during the February 2021 ERCOT event). Verify that the resulting cash‑outflow fits within your liquidity covenant.
3. Load‑factor sensitivity – Adjust the assumed load factor by ±10 % and recalculate block coverage. This helps identify whether a fixed‑rate or block‑and‑index contract better matches your actual consumption pattern.

UPG leverages its 30+ top‑tier supplier panel to run these simulations at no extra cost, delivering up to a 27 % spend reduction for clients who align contract structure with their risk profile.

How UPG arranges both structures

• Free Energy Health Check – We audit your last 12 months of bills, verify TDSP delivery‑charge allocations, and map your load profile to ERCOT nodal LMP trends.
• Supplier selection – With 25+ years in the Texas market, we match you to REPs that specialize in fixed‑rate or block‑and‑index products, ensuring competitive margins.
• Contract negotiation – Our team secures transparent index formulas, block sizing methodology, and demand‑charge caps that reflect your operational realities.
• Ongoing management – Quarterly performance reviews compare actual spend to the baseline, and we adjust block sizes or renegotiate terms as your load evolves.

Bottom line

Fixed‑rate contracts give you a single, predictable price and are ideal for flat, low‑variance loads or finance teams that demand budget certainty. Block‑and‑index contracts let you lock in a portion of your consumption at a known price while still participating in ERCOT’s market upside, making them a better fit for facilities with distinct peaks or a willingness to manage residual price risk. UPG’s 25‑year Texas expertise, 30+ supplier panel, and free Energy Health Check ensure you can choose the structure that aligns with your risk tolerance and load profile, and we’ll help you capture up to 27 % spend reduction.