The energy companies would typically have a long-term contract to buy and distribute energy at a rate agreed in advance. The rates are normally fixed at the time of a contract, unless they buy at the cash or spot or options market. It is also possible, they lock-in their price at different contract maturities after assessing their fixed / variable contract price with us. Either way, significant risks are involved under current circumstances.
So, they will also be hedging their energy to protect against any adverse movements. One needs to have a fairly good view of where the market is moving to make the hedge profitable or reduce the losses. The longer the cap, the longer the hedge, the greater the degree of accuracy required and greater the risk. That’s why the suppliers will have a bigger margin to offset the difference in their buying and selling prices — think currency rates.
while the shorter cap is itself a good idea to provide some dynamism and reduce the risk, the risks reduction should work both ways. It can’t be seen helping only the producers and leave the consumers high and dry.
I think the fix we all get could have a clause (like options contract) to benefit from lower prices. It will be attractive to have options built in the fixed deal. One will be paying a little additional premium to have the options built into the contract as the supplier is taking a risk of we cancelling the fixed contract and put in place a new contract.
The fixed contract gives a certainty to us and the supplier as the latter would know exactly the selling price for a set period of time. The built-in options will reduce the certainty from the supplier side.
Of course, the options are very risky and am simplifying the complex area at a high level to give an idea.
