Most Texas commercial buyers know two electricity procurement products: a fixed-rate contract and a variable-rate contract. For businesses with peak demand above roughly 500 kW, and particularly for industrial, hospitality, healthcare, cold storage, and multi-site operators with sophisticated load profiles, a third category matters: block-and-index energy contracts in Texas, along with the broader family of hybrid and layered procurement products that sit between pure fixed and pure index.
These products can produce lower total electricity costs than either fixed or index alone, but they also transfer more of the wholesale market risk onto the customer, and they require operational and financial capability that many mid-market buyers don't have. This guide walks through what block-and-index and hybrid energy products are, how they're structured, when they make sense, when they don't, and what a well-run block-and-index procurement process actually looks like.
The Commercial Energy Product Spectrum
Retail commercial electricity products in Texas fall along a spectrum from pure fixed to pure index, with an increasing range of hybrid structures in between.
Pure fixed-price contracts lock the customer's per-kWh energy rate for the entire contract term. Every kilowatt-hour delivered during the term is billed at the same rate regardless of what happens in the wholesale ERCOT market. The customer trades pricing flexibility for price certainty; the REP takes on all wholesale market risk in exchange for a risk premium built into the fixed rate.
Pure index contracts tie the customer's per-kWh energy rate directly to a specified wholesale market price index, typically the ERCOT day-ahead or real-time market settlement price at the customer's location, plus a per-kWh adder. The customer's monthly bill reflects wholesale market conditions in real time. When wholesale prices are low, the customer benefits directly. When wholesale prices spike, the customer's bill spikes with them.
Block-and-index (also called "layered" or "hybrid") contracts combine both approaches. A defined portion of the customer's expected load is priced at a fixed rate (the "block"), and the remainder is priced at the wholesale index (the "index tail"). The customer gets some of the price certainty of fixed with some of the potential upside of index.
Structured or custom contracts for very large customers can layer multiple blocks with different terms, index different portions of the load to different market products, or overlay financial hedges to modify the risk profile. These require dedicated energy management resources and are typically used only by industrial customers with peak demand well above 1,000 kW.
Each product category serves different customer profiles. There is no universally "best" product; the right choice depends on load characteristics, risk tolerance, operational sophistication, and current market conditions.
What is a Block-and-Index Contract?
A block-and-index contract for Texas commercial electricity divides the customer's expected load into two components. A specified percentage or fixed kW quantity is priced at a locked, contract-term rate. The remainder is priced at a specified wholesale market index (usually the ERCOT day-ahead or real-time settlement point price) plus a defined per-kWh adder.
The block component
The "block" is a fixed-price hedge covering a specified quantity of energy. Blocks can be defined in several ways:
As a fixed kW quantity: The contract specifies that the customer will be treated as consuming, say, 800 kW during on-peak hours, priced at a locked rate. Actual usage above or below this quantity is settled at the index.
As a percentage of expected load: The contract specifies that 60% of the customer's forecasted monthly usage will be priced at the fixed block rate, with the remaining 40% priced at the index.
As a defined block product: The contract specifies a specific ERCOT block product (5x16 on-peak, 7x24, or custom shapes) with a fixed rate for that block.
The block is essentially a fixed-price hedge that the REP arranges on behalf of the customer, drawing from the ERCOT wholesale forward curve at the time of contract signing.
The index component
The "index tail" is the portion of the customer's load not covered by the block. This portion is priced at the specified wholesale market index (ERCOT day-ahead LMP at the customer's load zone, or ERCOT real-time settlement point price, or another defined benchmark) plus a per-kWh adder that covers the REP's costs of serving that portion.
When actual usage in a given month exceeds the block, the excess is billed at index. When actual usage is less than the block, the customer may still owe the block cost (this varies by contract structure) or may receive a credit at index.
The layered structure
Some contracts layer multiple blocks with different terms. For example:
- A base block of 500 kW locked for the full 24-month contract term at $45/MWh
- A middle block of 200 kW locked for 12 months at $52/MWh
- An index tail covering all remaining consumption at ERCOT day-ahead LMP plus $8/MWh
Layered structures allow the customer to hedge different portions of load at different times, potentially capturing favorable forward curve pricing when it's available for shorter tenors.
The ERCOT Forward Curve and how Blocks are Priced
Understanding block pricing requires understanding the ERCOT forward curve. The forward curve is the set of wholesale electricity prices at which market participants can buy or sell energy for future delivery periods. It's continuously traded, and it reflects market participants' collective view of expected wholesale prices at various points in the future.
When a customer signs a block portion of a block-and-index contract, the REP arranges the underlying wholesale hedge by purchasing a corresponding financial or physical block from the forward market at the current forward curve price. The customer's block rate reflects that forward price plus the REP's margin and costs.
Forward curve prices vary by:
Location: ERCOT is divided into load zones (Houston, North, South, West) with distinct pricing. Locational Marginal Prices (LMPs) can differ substantially between zones.
Time period: Prices for delivery in the next quarter differ from prices for delivery two years out. Summer months typically trade at premiums to winter and shoulder months in the ERCOT curve.
Product shape: Different block products (5x16 on-peak, 2x16 off-peak, 7x8 weekend, 7x24 baseload) trade at different prices reflecting the underlying load and price patterns.
The forward curve moves daily based on natural gas prices, weather forecasts, generation resource adequacy, market-participant positioning, and other factors. A block purchased in January for July delivery may reflect very different pricing than the same block purchased in April for the same July delivery, even if wholesale market conditions haven't materially changed.
For a broader overview of how ERCOT wholesale market prices flow through to retail commercial contracts, our guide to ERCOT and how Texas electricity is priced covers the full market structure.
Who Block-and-Index is Appropriate For
Block-and-index is not for most Texas commercial buyers. It's a sophisticated product with real risk that requires operational and financial capability to manage responsibly. The customer profile where it makes sense:
Peak demand above 500 kW
Below 500 kW peak demand, the operational complexity of block-and-index typically outweighs the potential savings. Smaller commercial customers are usually better served by well-structured fixed-rate contracts with transparent pass-throughs, or by shorter-term fixed contracts that allow for opportunistic re-pricing.
Load with meaningful base component
Block-and-index works best for load with a substantial and predictable base component. A facility with 800 kW of steady 24/7 base load and 200 kW of variable peak load is a natural block-and-index candidate; the base can be blocked, and the variable peak can be indexed. A facility with wildly variable load (extreme peaks separated by long low-usage periods) is a poor candidate because the block rarely aligns with actual consumption.
Continuous-operation facilities (manufacturing, data centers, cold storage, telecom hubs) tend to be natural fits. Facilities with sporadic operations (event venues, seasonal businesses) tend not to be.
Financial capacity to absorb index volatility
The index tail carries direct exposure to wholesale ERCOT price movements. In normal months, this exposure is modest and predictable. In extreme events (a winter storm, a summer capacity crisis, unexpected outages), it can produce sharp bill increases. The customer must have the financial capacity to absorb these events without cash flow disruption.
Businesses with thin margins or tight cash management typically shouldn't take on direct index exposure. Businesses with healthy balance sheets and diversified revenue can absorb the volatility and benefit from the long-term average savings.
Operational capability to monitor market
A block-and-index contract requires ongoing engagement with wholesale market conditions. Someone (internal energy manager, external consultant, or the REP itself) needs to monitor forward curve movements, evaluate opportunities to layer additional blocks, and manage the index tail during volatile periods. Buyers who "sign the contract and forget about it" until the next renewal are not well-suited to block-and-index; they'll miss opportunities and be surprised by volatility they could have hedged.
Willingness to accept variable monthly bills
Block-and-index produces monthly bills that vary substantially with market conditions. A customer who cannot tolerate a 20% bill increase in a bad month (or wants the accounting simplicity of predictable monthly costs) is better served by a fixed-rate contract.
Advantages of Block-and-Index
For customers who fit the profile, block-and-index offers advantages that pure fixed contracts cannot match.
Lower expected long-term cost
Over multi-year periods, index pricing has historically produced lower average energy costs than fixed pricing for Texas commercial customers. The reason: the fixed rate that a REP quotes includes a risk premium (typically 5% to 15%) to compensate the REP for taking on wholesale market volatility. A customer who takes on some of that volatility directly (through the index component) captures the risk premium as savings in normal market conditions.
This is not a guarantee; index can be more expensive in specific years or during volatile periods. But over a well-designed multi-year procurement horizon, block-and-index has generally produced lower total costs than pure fixed for Texas commercial customers with appropriate load profiles.
Transparency
Block-and-index contracts are inherently more transparent than pure fixed contracts. The customer can see exactly what portion of consumption was priced at what rate. When wholesale market prices are low, the customer sees the benefit directly on the bill. When they're high, the customer sees the exposure directly. There's no black box.
Fixed contracts, by contrast, obscure the underlying market pricing. The customer pays the same rate regardless of what wholesale prices are doing, and the REP's margin fluctuates behind the scenes.
Ability to capture favorable market timing
Block-and-index allows the customer to add fixed-price hedges over time as favorable pricing appears. A customer with a base block already locked at $50/MWh can add another block at $42/MWh six months later when the forward curve moves. This layered approach captures pricing opportunities that a pure fixed contract (signed once, locked for the full term) cannot access.
Better alignment with actual load patterns
For facilities with distinct on-peak and off-peak load patterns, block-and-index can price different portions of load at rates that match their underlying wholesale market cost. A cold storage facility that runs base refrigeration 24/7 with a slight summer peak might block the base load at a low 7x24 rate and take the marginal summer peak at index. A retail chain that runs primarily on weekdays might block only the 5x16 on-peak load.
Direct capture of low-price periods
When ERCOT wholesale prices drop (typically shoulder seasons, mild weather periods, or when wind and solar generation is abundant), the index portion of the customer's load prices at those low market rates. Fixed contract customers don't see any of this benefit.
Risks of Block-and-Index
The other side of the transparency and flexibility is real market exposure.
Extreme price events
The largest risk in block-and-index contracts is exposure to extreme wholesale price events. During Winter Storm Uri in February 2021, ERCOT real-time prices hit the $9,000/MWh cap for extended periods. Customers with index exposure during that period faced monthly bills of tens or hundreds of times normal levels. Some businesses received bills so large they threatened solvency.
The ERCOT price cap was later reduced to $5,000/MWh, but the underlying reality remains: index-exposed customers can face extraordinary bills during grid stress events. Well-structured block-and-index contracts include mechanisms to limit this exposure (see the risk management section below), but the tail risk cannot be eliminated entirely.
Load forecast risk
Block-and-index contracts are typically priced against a forecasted load profile. If actual usage differs substantially from the forecast (either higher or lower), the customer can face unfavorable settlement. A block priced against expected 800 kW of base load can leave the customer short if actual base load is 900 kW (forcing more consumption into the index tail during potentially unfavorable market conditions) or overhedged if actual base load is 700 kW (leaving the customer paying for block quantity they didn't need).
Ancillary services and real-time market exposure
Beyond the day-ahead energy market, ERCOT bills participants for ancillary services (reserves, regulation, frequency response) and real-time market imbalances. Block-and-index contracts pass through some or all of these charges directly, exposing the customer to costs that are less predictable than day-ahead LMP alone.
Operational discipline required
The advantages of block-and-index (transparency, ability to layer blocks over time, direct capture of low-price periods) only materialize if the customer or their representative actively manages the position. A customer who signs a block-and-index contract and doesn't monitor market conditions may end up with a worse outcome than a well-priced fixed contract would have provided.
Bill volatility
Even in normal market conditions, block-and-index bills vary more than fixed bills. Accounting teams that expected predictable monthly electricity costs may struggle with variable bills; internal budget processes may need adjustment.
Contract complexity
Block-and-index contracts are substantially more complex than fixed contracts. They typically run 20 to 50+ pages, include detailed definitions of block products and index calculations, and specify complex reconciliation procedures. Legal and finance teams need to be involved in the review, and misunderstanding of specific terms can produce expensive surprises.
Structuring a Block-and-Index Contract
The specific structure of a block-and-index contract determines how well it serves the customer. Several key decisions:
Block percentage
What portion of expected load should be blocked at fixed rates?
High block percentage (70% to 90%): More price certainty. Less potential upside if wholesale markets soften. Suitable for customers with limited risk tolerance or budget-sensitive operations.
Moderate block percentage (50% to 70%): Balanced structure with meaningful hedge but real exposure to index. Suitable for customers with moderate risk tolerance and stable operations.
Low block percentage (30% to 50%): More index exposure. Higher potential upside if wholesale markets are favorable; higher potential downside if they aren't. Suitable for customers with strong risk tolerance and operational capability.
The right block percentage depends on the customer's risk profile, load characteristics, market outlook, and operational capability.
Block product shape
What ERCOT block products should be used?
7x24 baseload: Fixed price for every hour of every day. Best for continuous-operation facilities.
5x16 on-peak: Fixed price for 16 hours per day on weekdays (roughly 6:00 AM to 10:00 PM). Best for facilities with primarily weekday operations.
2x16 off-peak: Fixed price for the same 16-hour window on weekends. Useful for very specific weekend-focused operations.
7x8 overnight: Fixed price for the 8 overnight hours every day (roughly 10:00 PM to 6:00 AM). Useful for facilities with significant overnight base load.
Custom shapes: Larger customers can arrange custom block products that match specific load patterns.
Index selection
Which wholesale price index should the index tail be pegged to?
ERCOT day-ahead LMP at the customer's load zone. Prices are known one day in advance, providing some visibility. Most common index.
ERCOT real-time settlement point price. Prices reflect actual real-time market conditions. More volatile than day-ahead. Sometimes used for customers with flexibility to shift consumption in real time.
Load zone hub price. Blends multiple settlement points within a zone. Smoother than a single settlement point but may not perfectly match the customer's specific location.
Term length
Longer terms (24 to 36 months) provide more price certainty on the block portion but commit the customer for longer. Shorter terms (6 to 18 months) offer more flexibility but expose the customer to more frequent renewal cycles.
Reconciliation and true-up mechanics
Block-and-index contracts specify how differences between forecasted and actual usage are reconciled. Some contracts settle on a monthly basis; others provide annual true-ups. Reconciliation mechanics can produce meaningful cost impact and deserve careful review.
Managing the Index Tail
For customers who choose block-and-index, ongoing management of the index tail is where the advantages get captured (or lost).
Real-time monitoring
Effective index management requires monitoring wholesale market conditions in real time or near-real-time. This can be done through:
- Direct ERCOT market data subscriptions
- Third-party market intelligence platforms
- Reports from the customer's REP or energy consultant
Customers with in-house energy managers may handle this directly. Others outsource to consultants or rely on their REP for information.
Load response during high-price events
When ERCOT real-time or day-ahead prices spike, customers with index exposure may benefit from reducing consumption during the high-price interval. This is essentially demand response, though driven by pricing rather than a formal program.
For facilities with load flexibility (batch production, non-critical HVAC, deferrable processes), reducing consumption during a $500/MWh peak hour instead of running at normal levels can produce meaningful savings on the index tail.
Opportunistic block additions
If forward curve prices for a specific future period drop below the customer's current expectations, adding an additional block for that period locks in the favorable pricing. Block-and-index contracts typically allow customers to add blocks during the contract term as long as terms are agreed to in writing.
Ancillary services management
Some block-and-index contracts pass through ERCOT ancillary services charges directly. Understanding these costs and how they vary can inform decisions about when to reduce load or shift consumption patterns.
Post-event review
After extreme market events (winter storms, summer capacity crises), a post-event review of the customer's exposure and settlement helps refine future strategy. What worked? What didn't? Would additional block coverage have helped? Was the customer's response appropriate?
When Block-and-Index is the Wrong Product
For all its advantages for the right customer, block-and-index is genuinely wrong for many Texas commercial buyers. Signs that a customer is better served by fixed-rate or other products:
Peak demand below 500 kW
Below this threshold, the operational complexity typically outweighs the potential savings. Well-structured fixed contracts serve smaller customers better.
Cannot tolerate bill volatility
Businesses with strict monthly budget requirements, thin margins, or accounting teams that need predictable costs are better served by fixed contracts even if the average cost is somewhat higher.
No internal or contracted energy management capability
If nobody at the company or nobody the company works with is going to actively monitor market conditions and manage the index tail, the potential advantages of block-and-index will not be realized. Passive block-and-index management often produces worse outcomes than active fixed-rate procurement.
Highly variable or unpredictable load
Facilities with wildly variable consumption (event venues, seasonal businesses, businesses with irregular operating hours) don't match well against block products. The block frequently doesn't align with actual usage, producing settlement charges that offset expected savings.
Short contract horizon
Block-and-index makes more sense over multi-year horizons where the layered structure and opportunistic block additions can compound. For a 12-month term, the added complexity often isn't worth it.
Recently coming out of a bad experience
Customers who have recently experienced high electricity bills, contract disputes, or other stressful events often prefer the certainty of fixed contracts even if it costs slightly more. Emotional as this may sound, it's a legitimate factor: peace of mind has value.
A Working Example: 2 MW Manufacturer
Consider a Texas manufacturing facility with 2 MW peak demand and continuous 24/7 operations. Base load runs at approximately 1.4 MW; variable peak load adds up to another 0.6 MW during production surges. Monthly usage runs approximately 1.05 million kWh.
Option A: Pure fixed contract
A 24-month fixed contract at $58/MWh energy rate produces predictable monthly energy costs of approximately:
- 1,050,000 kWh × $0.058 = $60,900 per month energy
- Plus TDSP delivery, demand charges, and other pass-throughs
The customer knows their monthly energy cost exactly, regardless of what happens in wholesale markets.
Option B: Block-and-index at 70/30
A block-and-index contract with 70% of expected load blocked at a 7x24 fixed rate of $52/MWh, and 30% at ERCOT day-ahead LMP plus a $6/MWh adder.
In a normal month with day-ahead LMP averaging $38/MWh:
- Block: 735,000 kWh × $0.052 = $38,220
- Index: 315,000 kWh × ($0.038 + $0.006) = $13,860
- Total energy: $52,080
- Savings vs. pure fixed: approximately $8,820 per month
In a hot summer month with day-ahead LMP averaging $85/MWh:
- Block: 735,000 kWh × $0.052 = $38,220
- Index: 315,000 kWh × ($0.085 + $0.006) = $28,665
- Total energy: $66,885
- Additional cost vs. pure fixed: approximately $5,985
In a Winter Storm Uri-type event with day-ahead LMP averaging $2,500/MWh for the month:
- Block: 735,000 kWh × $0.052 = $38,220
- Index: 315,000 kWh × ($2.500 + $0.006) = $789,390
- Total energy: $827,610
- Additional cost vs. pure fixed: approximately $766,710
That last scenario is the tail risk. It's rare, but it's real. Well-structured contracts include mechanisms to cap or limit this exposure (index caps, deemed rates during ERCOT emergencies, or embedded financial hedges), but the customer must specifically negotiate these protections.
The multi-year picture
Averaged over a 24-month term with typical ERCOT market conditions and no extreme events, the block-and-index structure produces meaningful annual savings compared to pure fixed. In a term that includes an extreme event, the block-and-index structure may end up more expensive unless protective mechanisms are in place.
The right answer depends on the customer's risk tolerance, operational capability, and view of market conditions. There is no universally correct choice.
Financial Hedges vs. Physical Hedges
Some block-and-index structures use financial hedges (essentially swap contracts settled against wholesale price indices) rather than physical block products. The economics are similar but the accounting and legal treatment differs.
Physical hedges involve actual delivery of energy from the REP to the customer at contracted rates. These are the standard structure for most retail commercial block-and-index contracts.
Financial hedges involve cash settlement based on the difference between a fixed contract price and the actual wholesale market price, without physical delivery. These are more common for very large industrial customers with dedicated energy trading capability.
For most commercial buyers, physical hedges through their REP contract are the relevant structure. Financial hedges become relevant for industrial customers with hundreds of MW of load or with specific accounting requirements.
How Block-and-Index Fits into a Broader Procurement Strategy
For larger Texas commercial buyers, block-and-index is often one component of a broader energy strategy rather than a stand-alone product choice.
Portfolio construction
Some multi-site operators use different products for different sites based on load characteristics. A retail chain might use fixed contracts for smaller store locations and block-and-index for larger distribution centers.
Overlaid with demand response
Block-and-index customers with meaningful load flexibility can enroll in demand response programs, capturing revenue for verified load reductions during grid emergencies. The demand response revenue can offset some of the index tail exposure during volatile periods.
Combined with 4CP management
For customers with 4CP exposure, active management of the four coincident peak intervals can reduce transmission cost exposure in addition to the energy cost benefits of the block-and-index structure. Our overview of 4CP and summer peak demand strategy for Texas businesses covers this in detail.
Integrated with on-site generation or storage
Customers with on-site solar, battery storage, or backup generation can integrate these assets with a block-and-index contract to further manage the index tail. Discharging batteries during high-price intervals, for instance, reduces index exposure at exactly the moments it matters most.
Frequently Asked Questions
What is a block and index electricity contract?
A block and index (or block-and-index) electricity contract combines a fixed-price block covering a portion of the customer's expected load with an index-priced tail covering the remainder. The block is priced at a locked rate for the contract term (typically based on the ERCOT forward curve at signing). The index tail is priced at a specified wholesale market index (typically ERCOT day-ahead LMP) plus a per-kWh adder. Common structures range from 30/70 to 90/10 block/index splits depending on customer risk tolerance and load profile.
How does hybrid energy pricing work?
Hybrid energy pricing refers to any contract structure that combines multiple pricing mechanisms rather than a single fixed or single variable rate. The most common hybrid is block-and-index (fixed block + wholesale index tail). Other hybrids include layered blocks with different terms, financial hedges overlaid on physical contracts, and contracts with different pricing for on-peak vs. off-peak periods. Hybrid structures allow larger customers to match their pricing to their load characteristics and risk tolerance more precisely than pure fixed or pure index alone.
When should a business use block and index?
Block-and-index makes sense for Texas commercial buyers with peak demand above roughly 500 kW, meaningful base load, financial capacity to absorb index volatility, operational capability to monitor market conditions, and willingness to accept variable monthly bills. Below 500 kW peak demand or without operational management capability, well-structured fixed contracts typically serve customers better. Continuous-operation facilities (manufacturing, cold storage, data centers) are natural block-and-index candidates; sporadic-operation facilities (event venues, highly seasonal operations) generally are not.
What is the difference between a block hedge and a fixed contract?
A fixed contract locks the customer's per-kWh rate for the entire contract term regardless of actual consumption or market conditions. Every kilowatt-hour is billed at the same rate. A block hedge is a similar concept but applies to a specified quantity or percentage of load rather than the entire load. In a block-and-index structure, the block portion looks like a fixed contract for that specified portion, but the remaining load is not covered by the block and is priced separately at the index. Block hedges are components of block-and-index contracts; fixed contracts are stand-alone products.
What is the ERCOT forward curve?
The ERCOT forward curve is the set of wholesale electricity prices at which market participants can currently buy or sell energy for future delivery periods in Texas. It's continuously traded on the ERCOT wholesale market and reflects collective market expectations of future prices. Block-and-index blocks are priced against the current forward curve at contract signing, so the timing of when you sign directly affects the block rate you receive. The forward curve moves based on natural gas prices, weather forecasts, generation resource adequacy, and market positioning.
What is a heat rate in Texas commercial electricity?
Heat rate is the ratio of natural gas price to electricity price, expressed as MMBtu per MWh. It's a key wholesale market metric because natural gas is the marginal fuel for much of Texas power generation. When heat rates are high, electricity is expensive relative to gas; when they're low, electricity is cheap. Block-and-index customers with sophisticated market monitoring often use heat rates alongside other metrics to identify favorable moments to add block coverage.
What is a spark spread?
Spark spread is the theoretical margin a natural gas power plant would earn: the wholesale electricity price minus the fuel cost required to generate that electricity. It's essentially the inverse relationship to heat rate. Spark spreads matter for block-and-index customers because they influence when generators enter or leave the ERCOT market, which affects wholesale prices.
How much can block and index save vs. a fixed contract?
Historical patterns for Texas commercial customers with appropriate load profiles suggest 5% to 15% average energy cost savings over multi-year horizons compared to pure fixed contracts. However, the savings are averages: in favorable years, block-and-index can save substantially more; in unfavorable years, it can cost more. Extreme events (like Winter Storm Uri in 2021) can produce very large losses if the index tail isn't protected by explicit contract mechanisms.
What are ancillary services and how do they affect my bill?
ERCOT ancillary services are the reserves, regulation, and other grid services required to maintain reliable grid operation. Wholesale ancillary services costs are billed to load-serving entities (which include REPs) and are often passed through to block-and-index customers as separate line items. They typically add $1 to $5/MWh to the customer's effective wholesale cost, with higher levels during stress periods. Fixed-rate contracts bundle these costs into the fixed rate; block-and-index contracts often pass them through separately.
What is the wholesale price cap in ERCOT?
The wholesale price cap in ERCOT is the maximum price that can settle in the ERCOT wholesale market. As of 2026, the cap is $5,000/MWh (reduced from the previous $9,000/MWh cap following Winter Storm Uri). During grid stress events, real-time prices can hit this cap for extended periods, producing very large charges for customers with index exposure. Block-and-index contracts should include explicit provisions for how the customer is protected (or exposed) during cap events.
Can I add blocks during the contract term?
Yes, most block-and-index contracts allow customers to add additional block coverage during the term as market opportunities appear. Adding a block requires signing an amendment specifying the new block quantity, product shape, term, and rate. This is one of the main operational advantages of block-and-index: the ability to layer additional hedges opportunistically rather than committing all coverage at contract signing.
What is an index tail?
The index tail is the portion of consumption in a block-and-index contract that is priced at the wholesale market index rather than at a fixed block rate. If the customer has 70% of expected load blocked, the remaining 30% is the index tail. The index tail carries direct wholesale market exposure, both positive (when wholesale prices are low) and negative (when they're high). Managing the index tail through operational load adjustments and opportunistic block additions is the main ongoing task of a block-and-index customer.
Does my REP hedge the block portion in the wholesale market?
Yes, typically. When a customer signs a block portion of a block-and-index contract, the REP arranges the underlying wholesale hedge (physical or financial) to cover its obligation to deliver that block to the customer at the contracted rate. The REP's cost of that hedge, plus its margin and operating costs, determines the block rate quoted to the customer. This is why block rates track the ERCOT forward curve so closely.
What is a load zone in ERCOT?
ERCOT is divided into four load zones for wholesale pricing purposes: Houston, North, South, and West. Wholesale prices (Locational Marginal Prices, LMPs) can differ substantially between zones based on transmission constraints and local supply/demand conditions. Block-and-index contracts typically specify the applicable zone for pricing, and the customer's index tail is priced against that zone's LMP. Facilities within different zones may see different wholesale pricing even under structurally identical contracts.
How is a block-and-index contract billed?
Block-and-index bills are more complex than fixed-rate bills. A typical bill shows: block quantity delivered × block rate, index quantity delivered × (applicable index price + adder), plus TDSP delivery charges, plus regulatory pass-throughs, plus ancillary services (if separately billed), plus other applicable charges. Reconciliation of block vs. actual usage may appear as a separate line or may be handled through monthly true-ups. Customers should expect to spend more time reviewing block-and-index bills than fixed-rate bills.
What's the difference between block-and-index and load-following contracts?
Load-following (also called full-requirements) contracts have the supplier match the customer's actual consumption at a specified rate structure. All consumption is served, regardless of quantity, and the customer doesn't need to forecast load precisely. Block-and-index contracts separate consumption into blocked and indexed portions, with different pricing for each. Load-following is simpler but typically more expensive; block-and-index is more complex but can offer meaningful cost advantages for larger customers with appropriate profiles.
Where to go from Here
If your business fits the profile for block-and-index (500 kW peak demand and above, meaningful base load, financial capacity to absorb index volatility, operational capability to manage the position), the next steps:
- Compile a full load profile: 12 to 24 months of interval data broken down by month, day type, and hour of day. Identify base load, peak load, on-peak vs. off-peak patterns, and seasonal variation.
- Assess operational capability: Determine whether you have (or can hire) the expertise to monitor wholesale market conditions and manage the index tail through the contract term.
- Define risk tolerance: Understand how large a monthly bill increase your business can absorb without cash flow disruption. This informs how aggressive an index exposure is appropriate.
- Solicit competing quotes: Multiple REPs quote block-and-index contracts; pricing and terms vary substantially. A structured RFP produces better outcomes than accepting the first quote.
- Review contract terms carefully: Block-and-index contracts are complex documents. Legal and finance review is essential, and specific attention should go to index calculation methodology, reconciliation mechanics, ancillary services pass-through, and protective provisions during extreme market events.
Electric Decisions runs supplier-neutral procurement processes for larger Texas commercial buyers evaluating block-and-index and hybrid products. We do not sell electricity. We benchmark blocks against the live ERCOT forward curve, review contract terms in plain English, and ensure the customer understands the risk profile before signing. Our 5-step energy procurement process for Texas commercial buyers applies to block-and-index procurement as well as to fixed-rate contracts.
For related reading, our overview of manufacturing electricity procurement in Texas covers block-and-index applicability for manufacturing facilities, and our guide to demand charges and peak kW billing for Texas businesses covers the delivery-side charges that apply regardless of energy product structure. For businesses evaluating renewal timing that could open up new product options, our overview of when to renew your Texas commercial electricity contract covers the framework.
Block-and-index is not a beginner product. But for the right customer, it captures value that fixed contracts leave on the table. The decision comes down to load characteristics, risk tolerance, and operational sophistication, matched to a contract structure that fits.