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Fixed Rate Isn’t Always Clear Cut: The Importance of Understanding your Energy Contract

Fixed Rates 3

There are several options for businesses when it comes to choosing the right electricity supply contract – which tend to fall under either fixed, variable, or hybrid.

With a fixed contract, customers essentially pay the same price per kilowatt hour (kWh) during their contract term.  Variable pricing allows the price to rise or fall monthly based on the wholesale cost of electricity or natural gas.  Hybrid pricing is a cross between variable and fixed, where the contract period and/or supplies can be split between both rates.

In a 2013 survey of approximately 1300 mid-sized business managers taken by the Energy Research Council (ERC), it was found that 73% of executives prefer a fixed-rate supply contract for budget certainty.

However, fixed-rate isn’t always clear-cut.  There are a number of important things to consider when deciding on a fixed-rate contract:

  • It is important to compare apples to apples.  There are many different components to review and consider, such as capacity costs, ancillary charges, and adders to name a few.
  • It is essential to review and understand each supplier’s contract conditions, clauses, change-in-law provisions, fees and expirations that apply as these can tack on unexpected costs to the end charge.
  • Keep the possibility for consistent extreme weather in mind when deciding on a fixed-rate contract as change-in-law provisions or “pass-through costs” can cause an increase in bills.

As seen in January of 2014, the extreme weather events caused many regional transmission organizations (RTOs) to incur higher ancillary costs.  With instances like these, those additional costs can be passed to electricity suppliers who can then either absorb or pass them through to their customers.

In the same survey previously mentioned by the ERC, 49% of executives did not know if their current electricity supplier contract had a change-in-law provision.  For those who understood that their contract did have this clause – 32% believed that no pass-through fees are associated with it.

Many are calculating the winter of 2015 to be one for the books, and according to the 2015 edition of the Farmers’ Almanac, we are expected to see below-normal temperatures.  Unforeseen and uncontrollable weather may be the new norm, and it is imperative to understand contract clauses, and how they can greatly affect electricity prices as they impact RTOs, suppliers and in-turn, you – their customers.

The bottom line is, a fixed contract may not truly be fixed.  You are paying a premium for locking in a rate, but the non-rate component may make the perceived benefit of such moot, or severely diminished. Fixed price contracts are not a sin, but they can potentially be an expensive habit.