Evaluating Swing Contract Options

When evaluating natural gas contracts, one component that you may consider is the suppliers offering of swing options.  Swing refers to your business being able to go above or below the amount to be supplied, while still being billed or credited for any used/unused volume at your fixed or index price. Sometimes also referred to as “contract quantity”, the variance in swing ranges from 0-100%, while most suppliers will give you the option to have 0% swing, 10% swing or 100% swing.

Typically, if you choose a 100% swing option, also called “full requirements,” you may go above or below your amount to be supplied and still be billed at the contract price for the volume used. Adding at least some level of swing to a gas contract provides a level of protection for customers who are unsure of their volume requirements or expect that it may change, as well as those who have low risk tolerance for price fluctuations. Generally a premium is built into the fixed price to cover these usage fluctuations and that premium would likely be higher for a full requirements product than for a product with 10% swing.

Conversely, businesses that choose a product with no swing (0%) could see initial contact prices that may look slightly lower, but keeping in mind if you deviate from the projected volumes you could incur monetary penalties for going above or below the estimated agreed-upon amount to be supplied. When a contract has a 0% swing option, the supplier is putting the responsibility and risk on you as the customer.  Volumes from year to year could vary for a many reasons including using more or less of a current facility, expansion plans, or possibly most common based on the weather. Especially the last 4 years or so, the weather has been anything but normal. If you do consider a no swing contract, it would be important to evaluate your usage based on a weather normalized schedule to ensure you are prepared for any variations.

There may be some occasions when 0% swing could be a good option, such as if your business has a very predictable load (i.e. an industrial facilities with a flat load that doesn’t vary). As the needs and patterns of each business are different, when assessing contracts on behalf of our clients swing is definitely something that Power Management takes into consideration and discusses with you.

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