Municipal Supply RFP: Certainty Versus Lowest Expected Cost
A mid-sized city uses 85 GWh per year. Its current budget is $5.4 million. The council wants at least 90% budget certainty but also expects 6 GWh of new electrification load by 2028. Three bids arrive: Bid A, 100% fixed for three years at $64/MWh from an A-rated supplier; Bid B, 70% fixed at $61/MWh plus 30% day-ahead index, expected index $55/MWh, from a BBB supplier; Bid C, 100% index with a $75/MWh cap and a $1.80/MWh premium, expected index $55/MWh. Bid B demands a parent guarantee and 20% collateral if the city's credit deteriorates. Bid A offers ±5% volume tolerance; Bid B offers ±10%.
1. Calculate expected annual cost and worst-case cost at a $100/MWh index for each bid on 85 GWh. Which bid meets a 90% budget-certainty requirement?
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Bid A: 85,000 × $64 = $5.440 million. Bid B: 59,500 MWh fixed × $61 = $3.6295 million; 25,500 MWh index × $55 = $1.4025 million; expected total $5.032 million. At a $100 index: $3.6295 million + $2.550 million = $6.1795 million. Bid C: expected index cost $55 + $1.80 = $56.80/MWh, or $4.828 million; at the cap: $75 + $1.80 = $76.80/MWh, or $6.528 million. Only Bid A has a known maximum of $5.440 million, so only A meets 90% budget certainty as a stand-alone award. Bid B has the lowest expected cost but a worst case $0.78 million above A. Bid C caps extreme prices but still has a high capped cost. Expected cost and certainty are different tests; the council should compare worst-case against reserves, not just forecast.
2. The city expects 6 GWh of electrification load by 2028 and wants volume tolerance. Recommend a sourcing portfolio, with approximate weights and cost logic. Address why not simply choose the lowest expected-cost bid.
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Use layered sourcing: about 55% Bid A for core certainty (46,750 MWh), 30% Bid B fixed block (25,500 MWh), and 15% Bid C capped index (12,750 MWh). Expected cost = 46,750 × $64 + 25,500 × $61 + 12,750 × $56.80 = $2.992 million + $1.5555 million + $0.724 million = $5.272 million, about $62.02/MWh. If the capped index settles at $76.80, the total is $5.527 million, below Bid B's $6.18 million worst case but above Bid A. The 6 GWh addition is only 7% of 85 GWh, so ±10% volume tolerance can absorb it if phased. A split also diversifies supplier credit and gives the city a capped index sleeve for budget stress. Simply choosing Bid B concentrates 70% of supply with a BBB supplier and leaves 30% uncapped, which conflicts with the 90% certainty goal.
3. Bid B's supplier is rated BBB and asks for a parent guarantee and 20% collateral if the city's credit deteriorates. How should the city weigh this against A's A-rated offer?
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Price the credit, not just the energy. Bid B's fixed block is $3/MWh cheaper than A; on 59,500 MWh that is about $178,500 per year. A parent guarantee may be acceptable if the parent is stronger than the supplier, but collateral calls create liquidity risk for the city. Set collateral thresholds so no collateral is required while the supplier remains investment grade; require termination rights if the rating falls below BBB-; cap mark-to-market exposure; and avoid more than 50% award to one counterparty. If the parent guarantee is unsecured and enforceable, B can be retained at a smaller weight. If collateral can be called during a budget crisis, the city should prefer A or require B to post a standby letter of credit at its own cost. The credit term should be valued explicitly rather than ignored for a small energy-price advantage.