Real-life case (Brazil): when to lock power prices
A manufacturing company had the habit of signing a new contract in December, effective for one year, starting in January of the following year.
This routine was part of the company's board of directors' guidelines regarding all commodities needed for their production activities.
When I was hired at the beginning of a year, I proposed a new approach to the CEO. Follow market prices, and when there was a "sexy" offer for prices for the following year, then we would close the deal.
The CEO then invited me to a Board meeting to present the suggestion.
The board members agreed, and in March of that year, I submitted a routine methodology for the purchasing department to systematically consult the market.
A few months later, the market offered very attractive prices, which were below the weekly calculation I made of marginal expansion cost (MCE). MCE is an "agnostic" price, regarding new power plants, to be built considering a "balanced" internal rate of return for the capital expenditure.
So I suggested that they - then - quickly close a contract.
This was done, and the result was spectacular: the energy price for the following year was set at 30% BELOW the current (ongoing) price.
The good news is: this methodology is robust, tested, and easy to implement!
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