Matrix and Custom Pricing

Summary

Podcast Summary: US Energy Deep Dive

Episode: Matrix and Custom Pricing
Host: Seth
Date: April 8, 2025

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Main Theme and Purpose

This episode unpacks the intricate world of energy pricing in the US deregulated retail energy market, focusing on two primary approaches: matrix pricing and custom pricing. The hosts aim to demystify how energy suppliers set prices for businesses, who should choose which model, and the specific pros, cons, and contract nuances of each. The episode provides practical, jargon-free insights to help businesses navigate energy contracts confidently and choose the model that best fits their needs.

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Key Discussion Points & Insights

Introduction: Energy Pricing Simplified

• Energy pricing may seem dry, but understanding it is "absolutely crucial, especially for businesses" [00:16].
• Two major approaches are compared: matrix pricing (standardized, quick quotes) and custom pricing (tailored, negotiated) [00:16-00:29].
• Goal: Listeners should "be able to hold your own in any energy pricing conversation" [00:49].

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Matrix Pricing: The “Menu” Approach

What is Matrix Pricing?

• "Think about it like this. You're buying a new car...You see a sticker price on a standard model. That's matrix pricing." [01:13-01:23]
• Preset pricing structure, with businesses grouped by general characteristics—much like a rate card for energy.

Key Factors in Pricing:

• Annual Consumption: Total energy used over a year determines which pricing band you fall into [01:47].
• Load Factor: Measures how steady your usage is—steady users (high load factor) might get better rates [02:19].
• Location: Utility zone affects delivery costs [02:51].
• Contract Length: Longer contracts sometimes mean slightly better rates [03:07].
• Product Type: Most common is a fixed rate plan (12/24/36 months typical) [03:24].

Speed and Simplicity:

• "Getting a price quote is super quick with matrix pricing" [03:44].
  • Brokers can generate quotes instantly, sometimes even online.

Who is it for?

• Best for "small to medium sized businesses or as we call them in the industry, SMBs," including smaller commercial/industrial users with predictable energy needs [04:06-04:14].

Supplier Risk Management:

• Suppliers use averages across customer groups and build in "risk premiums" to cushion against variations [04:44-04:58].
• "It's all about managing those unknowns" [05:12].

Contract Terms:

• Highly standardized; little room for negotiation ("take it or leave it") [05:39-05:42].
• Simple fixed price per unit, standard term lengths [05:56-05:59].

Usage Bandwidth Clauses:

• Limit how much actual use can differ from estimates.
  • E.g., ±20% clause; exceeding this can trigger price adjustments or penalties [06:19-06:53].
  • "Those bandwidth clauses can be tricky. Definitely something to look out for in the fine print." [07:00]

Extra Costs:

• Some costs (regulatory, new laws) passed through, spelled out in the contract [07:21].
• Transmission/capacity costs usually bundled into the fixed price, so "less transparent in that sense" [08:00-08:02].

Termination:

• Early termination fees (ETFs) are standard and formula-based, depending on contract duration and usage [08:11-08:24].

Summary:

• Matrix pricing is about standardization, speed, and simplicity, best for SMBs with predictable use [08:32-08:44].

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Custom Pricing: The “Private Chef” Approach

Overview:

• "If matrix is like ordering off the menu at a restaurant, custom pricing is like working with a private chef." [08:52-08:59]
• Tailored price offer based on deep analysis of your specific business.

How it Works:

• Suppliers analyze everything: "your energy consumption, your risk tolerance, what kind of products you're looking for, even your credit worthiness" [09:10].
• Based on real-time wholesale market data; highly dynamic [09:10-09:24].
• "They go deep...analyze your historical energy use...in 15 minute or even hourly intervals." [09:30-09:43]

Product Flexibility:

• Wide product range, e.g.:
  • Index Pricing: Price tied to real-time market index (e.g., day ahead LMP [Locational Marginal Price]) [10:08-10:21].
    • "If you can shift your energy use to times when LMP is lower...you could save a lot of money." [10:33-10:39]
  • Block and Index: Part fixed, part variable [10:45-10:55].
  • Heat Rate Pricing: Linked to natural gas prices (multiplied by a fixed rate) [11:01-11:13].
  • Layered Hedging: Lock in prices for different usage portions over different periods—requires expertise [11:19-11:34].

Greater Transparency:

• "With custom pricing, those costs are often broken out separately, so you see them as individual line items on your bill." [11:46-11:55]
• More detail, but "you need a bit more internal expertise to make sense of it all" [12:05-12:17].

Market Sensitivity:

• Prices are "directly linked to what's happening in the wholesale energy market at that very moment"—highly time-sensitive [12:23-12:36].

Who is it for?

• "Typically it's the bigger fish...the larger commercial and industrial customers" [12:46-12:49].
• Those with complex needs, in-house expertise, or large energy volume [12:48-13:03].

Risk Handling:

• With custom pricing, risk is "much more explicitly defined and, and it's often shared" between customer and supplier [13:13-13:30].
  • Customers have more control over how much risk they're willing to take.

Contract Negotiation:

• Extensive negotiation possible—everything from usage tolerances to credit requirements and pass-through costs can be adjusted [13:48-14:46].
• "The supplier usually starts with their standard contract template, but...a lot of the key terms are up for discussion" [13:57-14:04].

Termination:

• ETFs are nuanced, often tied to the supplier’s real market replacement cost if you leave early [14:47-15:07].

Price Structures:

• Detailed; must clearly define any index used, adders, block sizes, contract flexibility (any duration, not just 12/24/36 months) [15:14-16:07].

Pass-through Costs:

• Broken out: capacity charges, transmission, ancillary services (frequency regulation, reserves), renewable portfolio standard (RPS) compliance, other market fees—a "data-rich" environment [16:07-16:41].

Baseload vs. Load Following:

• Load Following: Fixed price covers all usage as it fluctuates [16:53-17:11].
• Baseload Pricing: Price applies to predictable minimum demand; excess charged differently [17:13-17:22].

Creditworthiness:

• More important due to larger volume, complex terms; may require letters of credit or guarantees [17:38-17:55].

Summary:

• Custom pricing is best for large users with sophisticated needs, offering range, flexibility, transparency, but requiring more analysis and negotiation [18:00-18:27].

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Direct Comparison: Matrix vs. Custom Pricing

Ideal Customer:

• Matrix: "small to medium sized businesses (SMBs)" [18:50-18:58].
• Custom: "larger commercial and industrial customers" [18:58-19:02].

Price Basis:

• Matrix: "predefined standardized rates"—broad categories [19:07-19:15].
• Custom: "bespoke...very specific analysis" [19:15-19:27].

Product Offerings:

• Matrix: Simple, fixed-rate, rarely index-based products [19:48-19:54].
• Custom: "All the more exotic flavors": All index varieties, hybrid, and hedged products [19:54-20:11].

Customization & Contractual Flexibility:

• Matrix: Little customization; "take it or leave it" [20:19-20:24].
• Custom: High flexibility and negotiation possible [20:24-20:34].

Speed:

• Matrix: "Super fast"—instant quotes [20:41-20:47].
• Custom: Slower, requires analysis [20:47-20:59].

Terms & Conditions:

• Matrix: Boilerplate, little negotiation [21:05].
• Custom: Key terms open for negotiation [21:05-21:18].

Risk Allocation:

• Matrix: Supplier takes on more risk [21:24].
• Custom: "Risk is more explicitly defined and it's often shared" [21:24-21:39].

Transparency:

• Matrix: "Opaque...costs bundled together" [21:51-21:55].
• Custom: "Potential to be much more transparent" [21:51-22:13].

Supplier Effort:

• Matrix: "Lower effort," streamlined [22:28-22:35].
• Custom: "Much more labor intensive," hands-on analysis and negotiation [22:37-22:51].

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Market Influences on Pricing Models

Price Volatility:

• Volatile markets = Matrix pricing with higher risk premiums or less availability of long-term matrix offers; custom pricing offers more tools (hedges, index products) to manage risk [23:16-24:10].

Market Structure: Capacity vs. Energy-Only:

• Capacity markets (e.g., PJM, ICENY, NYISO):
  • Matrix: Capacity costs often bundled or opaque [24:40-25:06].
  • Custom: Options for fixing or passing through capacity costs, managing peak load contribution (PLC) [25:06-25:32].

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Notable Quotes & Memorable Moments

• Matrix pricing as the “rate card for energy”:
  "You're buying a new car...You see a sticker price on a standard model. That's matrix pricing." [01:13-01:23]

• Custom pricing as “working with a private chef”:
  "If matrix is like ordering off the menu at a restaurant, custom pricing is like working with a private chef." [08:52-08:59]

• On risk premiums:
  "They build in a little cushion. Yeah, what we call risk premiums." [04:55-04:57]

• On usage clauses:
  "Those bandwidth clauses can be tricky. Definitely something to look out for in the fine print." [07:00]

• On data transparency:
  "With custom pricing, those costs are often broken out separately, so you see them as individual line items on your bill." [11:46-11:55]

• On ideal customer fit:
  "It's a really good fit for small to medium sized businesses or as we call them in the industry, SMBs." [04:06]

• On market volatility:
  "In markets where prices are bouncing all over the place, you know, very volatile, suppliers have to protect themselves...you'll usually see matrix prices with higher risk premiums built in." [23:16-23:32]

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Timestamps for Important Segments

| Topic | Timestamp | |----------------------------------------|:--------------:| | Introduction to Pricing Models | 00:00–01:01 | | Matrix Pricing Defined / Key Factors | 01:06–03:24 | | Who Should Use Matrix Pricing? | 04:06–04:22 | | Supplier Risk Management | 04:31–05:15 | | Usage Bandwidth, Fees & Fine Print | 06:08–07:06 | | Hidden Costs in Matrix Pricing | 07:21–08:02 | | Summary of Matrix Pricing | 08:32–08:44 | | Shift to Custom Pricing | 08:45–09:10 | | Deep Dive into Custom Pricing | 09:10–11:47 | | Transparency & Negotiation | 11:53–14:46 | | Custom Contract Structures | 15:14–16:07 | | Pass-through & Baseload/Load Following | 16:07–17:31 | | Credit Issues in Custom Pricing | 17:31–17:55 | | Custom Pricing Recap | 18:00–18:27 | | Side-by-side Comparison | 18:27–22:51 | | Market Influence Discussion | 23:07–25:32 |

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Conclusion

This episode provides essential “cheat sheet” clarity for navigating US retail energy pricing. The hosts’ analogies (rate card vs. private chef) make matrix and custom pricing easy to grasp, and the side-by-side comparison empowers businesses to choose what best fits their size, sophistication, and risk appetite. The detailed breakdown of contract terms, risk allocation, and the impact of market volatility and structure makes this episode a must-listen (or “must-read”) for any business considering a retail energy contract.

Transcript

[A]

All right, welcome to the deep dive, everybody. Today we're diving into the sometimes confusing world of how energy suppliers figure out how to price their services for businesses.

[B]

Yeah, energy pricing, not the, not the most exciting topic, I'll admit.

[A]

But it's crucial, right?

[B]

Oh, absolutely crucial, especially for businesses. And we're zeroing in on two specific approaches, matrix pricing and custom pricing. You know, these are kind of like the two main flavors in the deregulated retail energy market.

[A]

I like that. Two main flavors. So we're talking about like the menu versus the, you know, the custom designed meal.

[B]

That's a great way to put it. One is kind of off the rack and the other is tailor made. And get this, we've got some really interesting docs that spell out all the details.

[A]

Consider this your cheat sheet. We've gone through all the jargon and dense language so you don't have to,

[B]

and by the end of this, well, you'll be able to hold your own in any energy pricing conversation.

[A]

That's the goal. We want you to know when each pricing model makes sense, what the real world consequences are for a business like yours.

[B]

Because let's face it, energy contracts can be a real headache if you don't understand the basics.

[A]

Totally. So let's kick things off with matrix pricing. Can you give us a breakdown of what that even means in plain English?

[B]

Sure. So imagine, think about it like this. You're buying a new car, okay. You walk onto the lot and you see a sticker price on a standard model.

[A]

Right.

[B]

That's matrix pricing. It's a preset pricing structure that energy suppliers have come up with. Basically, businesses get grouped together based on some general characteristics, almost like a rate card for energy.

[A]

So, so it's kind of like they've already decided on these price categories.

[B]

Exactly. They've done all the calculations in advance.

[A]

So. So what are the big factors that determine which category my business falls into?

[B]

Well, one of the biggest is your annual energy consumption, how much electricity or natural gas you use over the course of a year. So, like, they might have a price for businesses that use, I don't know, let's say 50,000 to 150,000 kilowatt hours per year.

[A]

Right.

[B]

And then another price for those who use even more, you know, higher consumption.

[A]

So they're not really digging into the specifics of how I use that energy. They're just looking at the total amount I'm consuming.

[B]

Exactly. It's more about that big picture number.

[A]

Okay, so consumption matters. What else do they factor in?

[B]

They'll Also look at your load factor.

[A]

Load factor, what's that?

[B]

Oh, sorry, yeah. Load factor is basically how steady your energy use is over time.

[A]

Okay.

[B]

Like a business that has a really consistent energy demand throughout the day, they'd have a high load factor. But a business that has these like sharp spikes in energy use, maybe during certain hours, would have a lower load factor.

[A]

Interesting. So even if two businesses use the same amount of energy overall, the one with the steadier use could get a different rate.

[B]

Exactly. Consistency is key.

[A]

Got it. Makes sense. Anything else they consider?

[B]

Well, your location matters too.

[A]

Like geographically.

[B]

Yeah, exactly. Your utility zone, basically. Because the cost of actually delivering the energy can change depending on where you are.

[A]

Right, right. Okay. And obviously the length of the contract I'm signing up for will affect the price too, right?

[B]

Oh, of course, longer contracts might get you a slightly better rate. And then there's the actual product itself, the kind of energy plan you're going with.

[A]

So what are some of the standard products offered under matrix pricing?

[B]

Well, matrix is really all about simplicity. So the products tend to be pretty straightforward.

[A]

Okay.

[B]

The most common is a fixed rate plan. You just pay the same price per kilowatt hour or therm for natural gas for the entire length of the contract. Typically those contracts are, you know, 12, 24, 36 months.

[A]

Yeah, yeah. Okay, that makes sense. So because it's all preset and everything, I'm guessing getting a price quote is super quick with matrix pricing, right?

[B]

Oh, yeah, super fast. That's one of the big advantages. You know, energy brokers or salespeople can often give you a quote, like right there on the spot. Sometimes you can even get it online.

[A]

Wow.

[B]

They don't have to do a ton of digging into your specific energy habits. They just figure out which category you fit into.

[A]

Convenient. So who is matrix pricing really designed for then? What kind of businesses benefit the most from this approach?

[B]

It's a really good fit for small to medium sized businesses or as we call them in the industry, SMBs.

[A]

SMBs, got it.

[B]

Yeah. Or even smaller commercial and industrial users. Businesses that have pretty predictable energy use. Nothing too wild or complex.

[A]

Okay, so not the businesses with, you know, the massive factories that are running 24 7.

[B]

Right. Those guys need something a little more. A little more tailored.

[A]

Now I'm curious, from the energy supplier's point of view, how do they manage their own costs and risks when they're using this kind of generalized pricing model? Because you're basically, you're assuming some level of risk.

[B]

Totally. That's a really important point. The way they do it is they basically look at the average energy consumption patterns of all the customers in a particular category, and then they build in a little cushion.

[A]

A cushion?

[B]

Yeah, what we call risk premiums.

[A]

Okay.

[B]

It's built right into the price because they know that, like, not every business in that consumption band is going to use energy in exactly the same way or respond the same way to price fluctuations in the market.

[A]

Right, right. So it's kind of like they're spreading the risk across a bigger pool of customers.

[B]

Exactly. It's all about managing those unknowns.

[A]

Smart. Okay, so we've talked about the basics of matrix pricing. Let's zoom in a bit on what a typical matrix contract actually looks like. You mentioned earlier that the terms are usually standardized.

[B]

Yeah, very standardized. It's usually based on the suppliers. Kind of like standard legal and commercial terms. Yeah. And there's not a whole lot of wiggle room to negotiate those fundamental aspects.

[A]

So it's pretty much take it or leave it.

[B]

Pretty much.

[A]

Okay. And then the price itself is usually straightforward, right?

[B]

Yep. Super simple. Usually it's just a flat fixed price per kilowatt hour for electricity or per therm for natural gas. And that price stays the same for the entire contract period.

[A]

No surprises there. How about contract lengths? Are those pretty standard, too?

[B]

Yeah, you'll usually see a set range of options, like 12 months, 24, 36. Sometimes you might see 48 months, but it's all pretty, you know, predetermined.

[A]

Okay. Now, I've seen some contracts that have these clauses about how much your actual energy use can differ from your initial projections. Can you explain how those work, especially in the context of matrix pricing?

[B]

You're talking about usage bandwidth clauses.

[A]

Usage bandwidth clauses?

[B]

Yeah. These basically give the supplier the right to adjust your price or sometimes even, like, penalize you.

[A]

Really?

[B]

Yeah, if your actual energy consumption ends up being way outside of the range they initially used to figure out your pricing.

[A]

Okay.

[B]

So, for example, a contract might say something like plus or minus 20%, meaning, you know, you can go up to 20% above your projected usage or 20% below without any issues. But if you go beyond that, well, there might be some financial consequences.

[A]

Wow. So even though I'm on a fixed rate contract, if my business suddenly takes off and I need a lot more energy, I could still get hit with the price increase.

[B]

That's a possibility, yeah. Those bandwidth clauses can be tricky. Definitely something to look out for in the fine print.

[A]

All right, noted. Now, what about all those extra costs beyond just the raw energy itself? You Know, like the cost of actually transmitting the electricity or various regulatory fees and things like that. How are those handled under matrix pricing?

[B]

Well, it kind of depends. Some costs get passed through directly to the customer.

[A]

Like which ones?

[B]

Things like changes in laws, changes, new regulatory charges, maybe some government mandated taxes. Those are often spelled out pretty clearly in the contract.

[A]

Okay.

[B]

But then you've got the big ticket items like transmission costs.

[A]

Right.

[B]

You know, the expense of moving the electricity across the grid and capacity costs, which is basically making sure there's enough power generation to meet demand.

[A]

Right, Right. So those aren't broken out separately.

[B]

Usually not in matrix pricing, those are typically just bundled into that overall fixed price. So you see one number, but you don't really see the individual pieces that make up that number.

[A]

Got it. So less transparent in that sense.

[B]

Yeah, I mean, you're not getting that super detailed breakdown of costs. And then if you need to end a matrix contract early. Well, there are fees involved, of course.

[A]

I mean, it's a contract. What are the fees?

[B]

Like, usually there's a standardized early termination fee or etf. The way it's calculated can be different depending on the contract, but it often depends on how much time is left on your contract.

[A]

Okay.

[B]

And your either your past energy use or how much they projected you were going to use. Sometimes it's just a preset amount that's spelled out right there in the contract.

[A]

Okay, so to recap, matrix pricing, then it's all about being standardized, simple, and getting you a quote fast. And it's a good option for smaller businesses that have pretty consistent energy needs.

[B]

That's a great summary.

[A]

Awesome. All right, so now let's shift gears and talk about the other side of the coin. Custom pricing.

[B]

All right, Custom pricing.

[A]

If matrix is like, you know, ordering off the menu at a restaurant, custom pricing is like working with a private chef.

[B]

Perfect analogy. Totally. It's all about that personal touch. With custom pricing, the energy supplier creates a unique price offer that's specifically designed for your business.

[A]

Okay.

[B]

They take into account things like your energy consumption, your risk tolerance, what kind of products you're looking for, even your credit worthiness.

[A]

Wow, they really do their homework.

[B]

Oh, yeah. And it's all based on what the wholesale energy market is doing at the time you get that quote. Quote. It's very, very dynamic.

[A]

Sounds a lot more complex than matrix pricing. So walk me through what makes custom pricing so so unique.

[B]

Well, first off, they go deep. I mean, they really analyze your historical energy use.

[A]

Historical data. Meaning?

[B]

Meaning they look at your actual energy usage in like 15 minute or even hourly intervals.

[A]

Wow.

[B]

So instead of just knowing your total yearly usage, they're seeing those little ups and downs throughout the day, the week, the year.

[A]

So they're getting a much more granular view of my energy habits.

[B]

Exactly. And because they're putting in that extra effort, they can offer a much wider range of energy products. It's not just a simple fixed rate anymore.

[A]

Okay, so what are some of the fancier options you get with custom pricing?

[B]

Oh, all sorts of interesting stuff.

[A]

Like what?

[B]

You've got index pricing. Index pricing, where the price you pay is tied to a specific market. Index.

[A]

Like what kind of index?

[B]

Well, one common one is the day ahead locational marginal price, or lmp.

[A]

Lmp?

[B]

It's essentially the real time wholesale price of electricity at a specific location on the grid.

[A]

So my price is basically going up and down with the market.

[B]

Yeah, but think about the advantage there.

[A]

Okay.

[B]

If you can shift your energy use to times when LMP is lower, like off peak hours, you could save a lot of money.

[A]

Interesting.

[B]

It's a level of control you don't get with matrix pricing.

[A]

Got it. What other options are out there?

[B]

Well, there's block it index, where you get a fixed price for a portion of your energy use and the rest is tied to a floating index.

[A]

Okay, so part fixed, part variable.

[B]

Exactly. Kind of a hybrid approach.

[A]

Yeah.

[B]

And then especially in areas where electricity is mostly generated from natural gas, you might see heat rate pricing.

[A]

Heat rate pricing. That's a new one.

[B]

Yeah. So with heat rate pricing, the electricity price is linked to a natural gas index, but it's multiplied by an agreed upon heat rate, and then they usually add in a little extra.

[A]

Okay, I'm following so far.

[B]

Good. Because it gets even more complex.

[A]

Oh, boy.

[B]

For bigger energy users, there's something called layered hedging.

[A]

Layered hedging.

[B]

This is where you can lock in prices for different portions of your future energy needs over different periods.

[A]

Sounds complicated.

[B]

It is, but it can be a really powerful tool for managing risk.

[A]

Okay, that's a lot of options. Anything else?

[B]

One of the most important things about custom pricing is that you get a lot more transparency in terms of those extra costs we talked about earlier.

[A]

You mean like transmission and capacity costs?

[B]

Exactly. With custom pricing, those costs are often broken out separately, so you see them as individual line items on your bill.

[A]

So I'm not just getting a single lump sum price.

[B]

Right. It's all laid out for you. You can see exactly where your money is going.

[A]

That's great. Especially if you're trying to really understand and manage your energy costs closely.

[B]

Exactly. But the flip side of that is you need a bit more internal expertise to make sense of it all. It can be a bit overwhelming if you're not, you know, if he's not really in the weeds on energy stuff.

[A]

Right, right. And you said earlier that custom pricing is really tied to the, the real time market.

[B]

Oh, absolutely. It's like directly linked to what's happening in the wholesale energy market at that very moment. So the price you get quoted today, it might not be the same price tomorrow or even a few hours from now.

[A]

So it's a, it's a moving target.

[B]

Yeah, yeah. That's part of what makes it custom. You know, they're taking all those real time market factors into account.

[A]

Makes sense. So who's the ideal customer for this kind of personalized pricing?

[B]

Typically it's the bigger fish.

[A]

Bigger fish?

[B]

Yeah, the larger commercial and industrial customers. They're the ones who really benefit from the flexibility and the, the deeper level of control that you get with custom pricing. They're also usually the ones who have the in house expertise and to make sense of all the data.

[A]

Okay, so it sounds like the way risk is handled is pretty different with custom pricing compared to matrix pricing.

[B]

Oh yeah, huge difference.

[A]

How so?

[B]

With matrix, the supplier is kind of absorbing more of the risk.

[A]

Okay.

[B]

They're looking at averages, they're building in those risk premiums, they're taking on that uncertainty. But with custom pricing, the risk is much more explicitly defined and, and it's often shared.

[A]

Shared?

[B]

Yeah. So the supplier is still factoring in the risk associated with your specific energy profile. But you as the customer, you have more options to choose how much risk you're comfortable taking on.

[A]

So it's a more collaborative approach.

[B]

Exactly. And it's reflected in the way these custom contracts are put together.

[A]

Okay, let's talk about the contracts then. You mentioned that there's more room for negotiation with custom pricing. How much negotiation are we talking about here?

[B]

It can get pretty extensive.

[A]

Really?

[B]

Yeah. The supplier usually starts with their standard contract template, but like a lot of the key terms are up for discussion.

[A]

So what kinds of things can I try to negotiate?

[B]

Well, for starters, those usage bandwidth clauses we talked about earlier. You know, how much your energy use is allowed to fluctuate.

[A]

Right.

[B]

You might be able to negotiate tighter or looser tolerances depending on how flexible your operations are.

[A]

Okay.

[B]

And then there are these things called material adverse change clauses or MC clauses.

[A]

MC clauses?

[B]

Yeah, those basically outlaw outline what happens if there's Some like huge unexpected change that affects the contract. You can negotiate those. The specific credit terms, maybe if you need a letter of credit, the definition of what counts as a pass through cost.

[A]

So it's really about tailoring the agreement to my specific circumstances.

[B]

Exactly.

[A]

And the early termination piece, those are handled differently too, I imagine.

[B]

Yep. They're usually a lot more complex and custom contracts.

[A]

Yeah.

[B]

And they're often tied to like how much it would actually cost the supplier to replace your energy supply in the market if you backed out early. So it's not just a simple formula like in matrix pricing.

[A]

Gotcha. So it's a more nuanced calculation.

[B]

Very nuanced. And speaking of nuanced, the price structures themselves can get pretty intricate.

[A]

Oh, I bet.

[B]

The contract has to spell out exactly how the price is going to be determined.

[A]

So if it's indexed to say the lmp, they have to define all the specifics of how that works.

[B]

Totally. Which index they're using, what the fixed adder is, how often the price is going to be updated. If it's block and index, they need to define the size and duration of that fixed price block.

[A]

Right. And with heat rate pricing, they have to specify the heat rate and the natural gas index they're using.

[B]

Exactly. It all has to be crystal clear in the contract. And the contract lengths themselves are more flexible too.

[A]

More flexible. So I'm not just limited to those standards. 12, 24, 36 month terms.

[B]

Nope. You can negotiate something that works for your specific needs.

[A]

So I could have a contract that's like 18 months or 30 months or something like that?

[B]

Sure. Or even a contract that's aligned with your company's fiscal year. It's all about customization.

[A]

Wow. Now let's circle back to those pass through costs. You said they're itemized in a custom contract. What specific costs am I likely to see broken out there? What?

[B]

Well, you'll probably see capacity charges, which are the costs of making sure there's enough power generation available, transmission costs, ancillary services, which are things like frequency regulation and operating reserves.

[A]

Right, right.

[B]

RPS compliance costs. That stands for renewable portfolio Standard rps.

[A]

Yeah.

[B]

And then a bunch of other market specific fees and assessments. It's all about transparency.

[A]

Makes sense. Okay, we touched on this earlier, but I want to dive a little deeper into the idea of load following versus baseload pricing. What's the distinction there?

[B]

Yes, that's an important one.

[A]

It's a bit. It's a bit jargony.

[B]

Yeah. Basically it has to do with how your Energy demand fluctuates over time.

[A]

Okay.

[B]

With load following, the price you agree on covers all of your energy use, no matter how much it goes up or down. Okay, but with baseload pricing, the price only applies to a certain, like, predictable portion of your energy use.

[A]

So like the minimum amount of energy I'm always going to be using.

[B]

Exactly. And then anything you use above that baseload amount might be priced differently.

[A]

Interesting. So it's kind of like having a two tiered pricing structure.

[B]

You could think of it that way. It can be beneficial for businesses that have those predictable baseload needs, but also have times where their energy use spikes up.

[A]

Okay, I'm getting it. And you mentioned earlier that creditworthiness is a bigger deal with custom pricing. Why is that?

[B]

Well, because you're usually dealing with much larger volumes of energy and the financial structures can get pretty complex. So energy suppliers are going to want to make sure you're, you know, good for it.

[A]

Right.

[B]

They might require things like letters of credit or even guarantees from a parent

[A]

company just to protect themselves.

[B]

Exactly. It's just good business practice when you're dealing with these larger, more customized deals.

[A]

All right, so to sum it up then, custom pricing is a very individualized approach that's best suited for larger energy users with more. With more sophisticated needs. And it offers a wider range of product options, more flexibility in terms of the contract terms, and potentially even more transparency in the pricing.

[B]

Yep, that's a great way to put it. But it does require more analysis, more negotiation, and a bit more expertise on the customer side.

[A]

Right. It's not just a simple plug and play solution. Okay, so we've looked at matrix pricing and custom pricing individually. Now I think it would be helpful to like, compare them directly across some key dimensions just to like, really drive home the differences.

[B]

I agree. A side by side comparison can be really helpful.

[A]

All right, so first up, the ideal customer. Who is each pricing model really targeting?

[B]

Well, we kind of touched on this already, but matrix pricing is really aimed at those small to medium sized businesses, the SMBs.

[A]

Right, right.

[B]

While custom pricing is more for those larger commercial and industrial customers.

[A]

Okay, so size definitely matters. What about the basis for how the price is actually determined?

[B]

With matrix pricing, it's all about those predefined standardized rates. It's all based on those general categories that we talked about.

[A]

Right, those broad buckets.

[B]

Exactly. But custom pricing, it's a much more bespoke approach. The price is based on a very specific analysis of your individual energy usage patterns.

[A]

So that's where all that granular data comes in.

[B]

Yep. Matrix pricing is looking at broad bands of usage and load factor. Okay, but with custom pricing, they're diving into Those tiny like 15 minute or hourly intervals of energy consumption.

[A]

Alright, so the depth of analysis is a big differentiator. What about the types of energy products that are typically offered?

[B]

Matrix pricing is pretty much limited to those simpler products like primarily fixed rate contracts.

[A]

Right, Right.

[B]

Although sometimes you might see some basic index based options. But. But with custom pricing, oh man, the world's your oyster. Meaning you get access to all those more complex products we talked about earlier. Different kinds of index pricing, block and index structures, heat rate pricing, all that fun stuff.

[A]

Right. All the more exotic flavors.

[B]

Exactly.

[A]

Okay, so in terms of how much, I can actually customize the agreement itself. How do those compare?

[B]

Matrix pricing, Not a whole lot of flexibility there.

[A]

Okay.

[B]

It's pretty much a standardized offer, take it or leave it.

[A]

Right, Right.

[B]

But with custom pricing, there's a lot of room for negotiation. You can really tailor both the price structure and the terms and conditions of the contract.

[A]

All right, so if I want to have a say in the details, custom pricing is the way to go. What about the speed of getting a quote?

[B]

Matrix pricing, it's super fast. Often you can get a quote instantly.

[A]

It's already done all the calculations.

[B]

Exactly. But custom pricing takes a bit longer because they have to do that individual analysis and they have to factor in all those real time market conditions.

[A]

I shouldn't expect a quote on the spot.

[B]

Probably not.

[A]

All right, let's talk contracts. How do the terms and conditions compare?

[B]

Matrix contracts are very standardized. Often they're just using boilerplate language. Not a lot of room for negotiation. Okay, but custom contracts, the terms and conditions are often negotiated between the supplier and the customer.

[A]

Okay, and what about the allocation of risk? We touched on this earlier, but how's that handled differently?

[B]

With matrix pricing, the supplier's generally taking on more of the risk. Okay, but with custom pricing, the risk is more explicitly defined and it's often shared between the supplier and the customer.

[A]

Right. So it's a more balanced approach in that sense.

[B]

Yeah, you're both kind of sharing that burden of uncertainty.

[A]

What about transparency? How do the two pricing models compare in terms of how much insight I get into the actual cost components of the energy price?

[B]

Matrix pricing tends to be a bit more opaque.

[A]

Opaque?

[B]

Yeah. Meaning it's not always clear what's driving the price. A lot of costs are just bundled together. Okay, but custom pricing has the potential to be much more transparent. Yeah. Because they're often using those granular pass throughs for all those different market components, you can see exactly what's contributing to your final price.

[A]

Gotcha. So if I'm a data nerd who likes to really dig into the details, custom pricing might be more my style. All right, last comparison point. From the energy suppliers perspective, how much effort is involved in setting up each type of pricing agreement?

[B]

Matrix pricing is definitely lower effort.

[A]

Okay.

[B]

It's all standardized, so they can kind of crank those out pretty efficiently.

[A]

Right, like an assembly line.

[B]

Exactly. But custom pricing, oh man, that's a much more labor intensive process because they're

[A]

doing all that individualized analysis and customization.

[B]

Exactly. Plus all that negotiation.

[A]

Right, right. It's a much more hands on approach.

[B]

Very hands on.

[A]

Okay. So I think that comparison really clarifies the key differences between matrix pricing and custom pricing. Now let's talk about how the specifics of different energy markets can influence which pricing model is more common or how these models are structured.

[B]

Yeah. The market itself plays a huge role. So many factors to consider.

[A]

All right, let's take them one by one. First off, how does the level of price volatility in a market affect thing?

[B]

Ah, volatility, the energy market's favorite word.

[A]

Right.

[B]

So in markets where prices are bouncing all over the place, you know, very volatile suppliers have to protect themselves.

[A]

Makes sense.

[B]

So you'll usually see matrix prices with higher risk premiums built in.

[A]

Okay.

[B]

Because they don't want to get caught off guard if wholesale energy prices suddenly spike up.

[A]

Right. They need that buffer.

[B]

Exactly right. And on the flip side, for customers who are comfortable with a little more risk, custom pricing can be really appealing in those volatile markets.

[A]

Why is that?

[B]

Because it gives them more tools to manage that risk.

[A]

Okay.

[B]

They can use index linked products, they can hedge, they can use those pass through structures we talked about.

[A]

So they have more control over how they ride those price swings.

[B]

Precisely. And you're less likely to see suppliers offering those long term fixed rate matrix contracts in volatile markets.

[A]

Just too much uncertainty.

[B]

Exactly. It's too risky for them. Now, in markets where prices are pretty stable, matrix pricing can be super competitive.

[A]

Okay.

[B]

And you might not see as big of a price difference between a matrix fixed rate and a custom fixed rate, especially for bigger companies with stable usage patterns.

[A]

So market volatility really dictates the playing field big time. All right, what about the overall structure of the market? Whether it's capacity market or an energy only market.

[B]

Ah, another big one.

[A]

Can you explain that difference for our listeners?

[B]

Sure. So in capacity markets. Yeah, these are markets like pjm, ICE and E or ny. So.

[A]

Okay.

[B]

A big chunk of the cost of electricity comes from making sure there's enough power generation available, you know, to meet peak demand.

[A]

Right, Right.

[B]

So with matrix pricing in those markets, those capacity costs are often just lumped in with the energy price.

[A]

Okay.

[B]

Or they might be a separate pass through charge, but it's not super transparent.

[A]

Okay. So I'm not really seeing the breakdown of how that capacity cost is calculated.

[B]

Exactly. But with custom pricing in those same capacity markets, you can get much more sophisticated about how you handle those capacity costs.

[A]

Okay, how so?

[B]

Well, you can choose to have those comps fixed.

[A]

Okay.

[B]

Or you can have them pass through based on your actual contribution to the system's peak load. That's often called your peak load contribution or plc plc.

[A]

Got it.

[B]

And you can even use financial instruments to hedge against capacity price swings.

[A]

So in a capacity market, custom pricing gives me more options to manage those reliability related costs.