Top Electricity Buying Myths

In working with many energy buyers throughout the years, I have picked up on a few common misconceptions about the electricity marketplace. Below are the common myths and the explanations that will debunk them.

 

1. The bigger the user the lower the rate.

While it is true that large consumers of electricity can obtain low rates, it is not necessarily their size that drives the low rate. The largest factor to lower rates is how you use electricity not how much you use. The main cost of your electricity supply is the electron itself. This electron is a commodity in the truest sense. The value of a commodity does not change with the amount that is purchased. There may be service fees that can be reduced if large quantities are purchased but the value of the electron itself is not impacted. Think of it like buying a stock, the price is the same regardless of the number of shares that are purchased.

What will impact your rate is how you consume the electricity. The price for electricity changes every hour based on the instantaneous supply and demand for the commodity. Similar to the old days of on peak telephone plans, electricity has premium hours. These high priced hours occur when the demand for electricity is the greatest.

The price shape (each hourly price plotted over time) along with your consumption shape (hourly consumption plotted over time) can have a double down effect. Increased consumption during the high prices can drive up your rate by as much as 30%. In addition, certain costs such as capacity are driven by your consumption during the peak summer hours. If your consumption is high during those hours you will be paying the higher capacity price for the entire next year.   Reduced consumption during high priced hours along with reduced consumption during peak summer hours can be extremely effective in rate reduction regardless of your size.

 

2. If I aggregate with other buyers my rate will go down.

Although there is a perceived “safety in numbers” effect of banning together for purchasing, invariably electricity buyers within aggregated groups end up subsidizing one for the other. This is especially true for manufacturers whose load shape can vary significantly. Aggregating electricity buyers into purchasing groups averages the load shape. Those with good load shapes improve the rates for those with poor load shapes. In doing so, they give away the benefit of their good shape and end up increasing their rates to the weighted average of the group. This averaging will produce individual winners and losers. Tip: Obtain a rate on your own and then compare it to the buying group to figure out into which camp you will fall.

 

3. A fixed rate is fixed.

A majority of customers choose to lock in their rate for a period of time with the expectation that it will not change during the term of the agreement. As you may have seen from your own experience it doesn’t always work that way. Every energy supply contract has a provision to cover costs for when “you know what” hits the fan. These unknowns hitting the fan generally come in the form of a change in law or regulation that impacts the cost to supply your load. Suppliers are able to pass through these costs via a “material adverse change” or “regulatory change” clause deep within the terms and conditions of their contracts.

The “fairness” of such pass-through charges is difficult for many consumers to feel comfortable with since, for goodness sake, you signed a fixed contract. The reality is that if a supplier had to include the change-of-law risk in your price, your fixed rate would be considerably higher. It would even be difficult to find a supplier willing to price such a "risk premium" because they can’t quantify what they don’t know.

If a supplier does invoke pass-through provisions in your contract you should immediately contact your energy advisor to validate the event. This validation not only includes “did this occur” but "how much should I be paying for this event?”.