CEP Procurement Strategies & Contract Management 2 — Questions and Answers
Question 1: A company wants to hedge against price volatility while retaining upside potential. Which procurement structure best achieves this?
- Fixed-price contract for full load
- Index-based contract with a price cap (Correct answer)
- Spot market purchases only
- Load-following contract with no ceiling
Correct answer: Index-based contract with a price cap
An index-based contract with a price cap limits downside risk while allowing the buyer to benefit if market prices fall below the cap.
Question 2: What does 'basis risk' specifically refer to in energy procurement?
- The risk that a supplier defaults on delivery obligations
- The difference in price between the delivery point and the pricing hub (Correct answer)
- The credit risk embedded in a long-term fixed contract
- The risk of load forecast error affecting contract volumes
Correct answer: The difference in price between the delivery point and the pricing hub
Basis risk is the price differential between a regional delivery point and the benchmark trading hub (e.g., ERCOT North vs. Henry Hub).
Question 3: In a Request for Proposal (RFP) for electricity supply, which element is MOST critical to include to enable apples-to-apples supplier comparison?
- A list of preferred suppliers
- Standardized load data and a common pricing template (Correct answer)
- The buyer's current utility tariff rate
- Supplier financial statements
Correct answer: Standardized load data and a common pricing template
Standardized load data and a uniform pricing template ensure all suppliers bid on identical terms, enabling direct price comparison.
Question 4: Which contract term allows an energy buyer to exit a fixed-price agreement early if market prices drop significantly?
- Evergreen clause
- Termination for convenience provision (Correct answer)
- Swing tolerance clause
- Force majeure clause
Correct answer: Termination for convenience provision
A termination for convenience clause allows the buyer to exit the contract, typically subject to an early termination fee.
Question 5: A manufacturer with highly seasonal energy demand should prioritize which contract feature?
- Flat block supply with no flexibility
- A swing or tolerance band allowing volume variation (Correct answer)
- A fixed daily volume requirement
- A capacity-only contract
Correct answer: A swing or tolerance band allowing volume variation
A swing or tolerance band permits the buyer to take more or less energy than the contracted volume within defined limits, accommodating seasonal variation.
Question 6: What is the primary purpose of a 'step-up' provision in a natural gas supply contract?
- To increase the contract price annually based on inflation
- To allow an alternate supplier to fulfill obligations if the primary supplier defaults (Correct answer)
- To escalate the buyer's credit requirements over time
- To add renewable energy attributes to the contract each year
Correct answer: To allow an alternate supplier to fulfill obligations if the primary supplier defaults
A step-up provision designates a backup counterparty who assumes supply obligations if the primary supplier fails to perform.
Question 7: When evaluating supplier bids on a total cost of ownership (TCO) basis, which cost is most commonly overlooked?
- Commodity energy cost
- Capacity charges and ancillary service costs (Correct answer)
- Transmission and distribution charges
- Sales tax on energy purchases
Correct answer: Capacity charges and ancillary service costs
Capacity charges and ancillary services are often not explicitly quoted but can represent 30–50% of total electricity costs in many markets.
CEP Procurement Strategies & Contract Management 2
A company wants to hedge against price volatility while retaining upside potential.
Which procurement structure best achieves this?