Archive for November, 2012

When to Lock In a Fixed Business Electricity Contract in PA

In discussing the best time to lock in fixed business electricity rate contracts, there is a wide misconception that fixed electricity rates go down during the fall and spring season of the year. While recent historical data may lead one to believe this may be the case, following this to an end in itself is a fallacy and can cost businesses money as they sit around and wait for prices to potentially fall.

Fixed electricity pricing is based on future forward contracts. With natural gas being a significant source of electricity generation in Pennsylvania, fixed rates are highly correlated with natural gas future contracts. This means that when you look to lock in a two year fixed electricity price, the forward natural gas prices for the next 24 months have an effect on the final fixed price for power. Every month included in the duration of the contract will have a set rate the moment the contract is signed. The final fixed price will be the weighted average of the estimated amount of electricity a business is expected to use for a given month times the rate. This means if a Pennsylvania business customer decides to lock in a fixed commercial electricity rate in the middle of summer the price will take into account the cooler months that come along with the fall and spring seasons.

Locking in a fixed rate will protect Pennsylvania business customers from the volatility associated with the energy market. The fixed rate will put a ceiling on the price if the market were to rise during the term of the contract. If the market were to drop you are not necessarily stuck with having to pay a higher rate. More and more electricity suppliers are offering the blend and extend option in Pennsylvania. This allows a business electricity customer on a fixed rate product to immediately lower their rate at any point during the term of the contract in return of extending out the contract. Exercising this option will maximize the savings for the initial term of the agreement while extending out protection against the risk of a potential rise in future energy prices.

Fixed rates are the most common rate structure for those looking to get off PPL, Met-Ed, or PECO’s high default rates. One appealing feature of fixed rates is the transparency in allowing a company to forecast their annual electricity expenditures. Those businesses still on the utility default rate will have to deal with large swings in costs when the electric bill comes due. Budget certainty is a great asset to have when dealing with a volatile market. With the blend and extend option in place, Pennsylvania business customers looking to sign a fixed rate may want to consider locking in a term for several years.

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PA Electric Switch Time Shortens

The Pennsylvania electricity market is becoming more efficient as consistent market growth in customer and supplier participation has occurred. The Pennsylvania Public Utilities Commission announced that the enrollment window for a customer wishing to change electricity suppliers will shorten from 16 days to 11 days.

The enrollment window is the amount of time that a customer needs to submit their supplier change request prior to their meter read date. If the switch request is made inside of the enrollment window than the switch will not occur until the next months meter read date. Often this is the case causing a full two billing cycles to pass before a customer sees their new rate kick in. The large amount of time that passes between choosing an alternative supplier and actually seeing the effects on the electric bill has caused confusion and uncertainty in a new market for many consumers. When a customer chooses a lower rate, and then gets their bill 2 weeks later with the old higher rate still showing, the customer starts to doubt whether the switch has been made.

Why such a long wait period?

Customers participating in electricity choice for the first time are expecting the new low rate they have selected to kick in right away. Unfortunately this is not how the market currently functions. When a consumer chooses a competitive electricity supplier, that supplier than submits the order to the utility company who is regulated by the PA Public Utility Commission. With the market still being in its infancy, the utilities require a large enrollment window to get customers switched.

What is actually switching?

Switching electricity suppliers doesn’t involve manipulating the actual lines and wires. The way you receive power remains the same. The aspect that changes is who is billing you for your electricity supply, and at what electricity price. Even the billing period remains the same, and this is the reason that the switch has to wait until your scheduled meter read date. The utility (PECO, PPL, Duquesne, etc..) currently does not have the ability to charge from one rate structure for the first half of the billing period and then another for the second half; so the consumer has to wait until their meter read date when the billing period resets.

The move to real time switches

The change from a 16 to a 11 day enrollment window is a step towards real time switch ability; choosing a new rate plan one day and having that rate take effect immediately. As the electricity choice market becomes more mature it also becomes more efficient. There has been a lot of comparisons between the Texas electric choice market to that of Pennsylvania. When Texas first became deregulated in 2002, residential customers had to wait between 1-2 months after selecting a competitive price before they would see that price on their electric bill. Sound familiar? Ten years later, and the switch date is down to seven business days for shopping customers and only three days for customers moving into a new home. In addition, the actual competitive suppliers offering Dallas energy prices have the ability to turn the power on for the customer. In contrast, Pennsylvania suppliers have to turn the request over to the local regulated utilities which slows up the competitive process. When Pennsylvania allows suppliers to turn on service for customers, customer participation should grow exponentially.





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New York Electric Choice Gives Price Stability to NYSEG Customers

Electricity choice in New York allows energy users to shop for competitive electricity and natural gas rates among a variety of companies offering innovating rate product options. Prior to the electricity market deregulating, residential customers were forced to accept the rate structure offered by their local utility company. With New York electricity choice these same customers can elect how they purchase their power through different term options and ways the power is generated. For example, New York electricity consumers who think energy prices will be rising might decide to lock in a fixed electric rate for 36 months. If they think prices will go down after the current season they might decide to lock in a six month fixed rate so that they are not bound to a contract for too long.

Customers of NYSEG, the third largest electric utility company in the state, pay an electricity supply rate through NYSEG that is variable. The variable rate changes monthly in response to the wholesale electricity market. Electricity prices like this can be very volatile as they are somewhat tied to other global energy markets such as natural gas and coal. World events and abnormal weather patterns can have huge effects on energy prices. It would not be uncommon for a variable rate structure to rise by 20% or more in one month.

However with choice, NYSEG electricity customers can mitigate the volatility by locking in low fixed electric rates through competitive energy companies called Electricity Service Companies (ESCOs). When a NYSEG customer chooses an ESCO to supply their power, the customer continues to be charged for delivery service by NYSEG. Since the NYSEG supply rate changes on a monthly basis, competitive ESCOs are usually unable to guarantee savings to customers, however by offering a fixed rate they are able to offer price stability for consumers who may not be able to afford a large rise in energy prices resulting in a higher than expected NYSEG electric bill.

Choosing a competitive electricity company that offers a low fixed electric rate has been the strategy for about 25% of NYSEG electricity customers.


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Low Natural Gas Prices have kept Commercial Electricity Rates Down in Pennsylvania

With natural gas prices at low levels, more and more energy suppliers are using natural gas as the primary source to generate electricity. The increase percentage of natural gas in electricity generation production in Pennsylvania has caused commercial electricity rates and natural gas prices to be highly correlated; A rise in natural gas prices is sure to be followed by a jump in electricity rates.

Natural gas levels have boomed in recent year thanks in part to fracking, the method of pumping chemicals into the ground to extract the natural gas from shell rock. With storage levels near capacity, businesses in Pennsylvania have enjoyed declining commercial electricity rates for the past 3 years beginning in January 2010 when Pennsylvania Power and Light’s cap rates expired. These low rates have been marked by mild winters causing low demand to put further downward pressure on Pennsylvania’s electricity rates.

The high supply of natural gas does not mean Pennsylvania’s electricity rates will stay at low levels. The energy market remains extremely volatile and can easily jump in a short period of time as seen in 2008 when energy prices tripled. With natural gas levels near capacity and electricity rates near 10 year lows, businesses in Pennsylvania should start considering locking in a fixed electricity rates for the long run. This will protect the company against any unforeseen spikes in the energy market for the duration of the contract. Electricity choice gives business consumers the flexibility to buy power at advantageous times. With natural gas and electricity prices starting to bounce off of their lows in a time right before the winter season, now is the idea time to execute fixed commercial power contracts.

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