The severe cold experienced by much of the country over the past few weeks serves as a good reminder that when customers are shopping for a low electric rate, they need to shop around and not just pick the first supplier that they see with a low rate.
The recent severe cold weather has shot up wholesale electricity prices, particularly in New England. For example, wholesale electric rates in New England are now routinely in the $250 per megawatt-hour (MWh) range, about five times higher than normal.
But the biggest shocker came during this past weekend's snowstorm, which saw electric prices in New England top out at the cap of $1,000 per MWh -- about 20 times higher than normal.
These sudden and volatile spikes in wholesale electric costs burden the retail electric providers which supply your power. When severe cold causes power prices to suddenly spike, retail energy suppliers who do not hedge can find themselves having to post millions of dollars to pay for electricity on short notice, plus additional money in collateral and credit required to operate in the market.
Even retail electric suppliers who do prudently hedge -- locking up their supply ahead of the price spikes -- may be exposed to some of the volatility for "swing" load -- the electricity used by their customers which deviates from the forecast usage.
The crushing weight of these volatile electric costs of up to $1,000/MWh (or in some states such as Texas, even higher) can cause retail electric suppliers to default or go out of business, leaving their customers stranded and transferred to the "Provider of Last Resort" -- a safety net that provides customers with electricity, but often at a disadvantageous price.
Indeed, this happened just this past February in New Hampshire due to an unexpected severe cold snap, as a retail supplier defaulted on its obligations to the regional grid operator, and dropped customers to the Provider of Last Resort.
It's also happened in Texas, as the aftermath of the February 2011 cold snap caused at least one retail electric provider to default and transition customers to the Provider of Last Resort.
These experiences show that the electricity market is a volatile place, and electric companies participating in the market have to be on sure financial footing. That means when you're shopping for an electric supplier, you can't just look at the rate that they're offering. Sometimes a company may offer you a low rate to entice you into signing up, but the rate is artificially low because they are gambling that the wholesale market won't spike to $1,000/MWh. And if they bet wrong, you could find yourself dropped to the Provider of Last Resort.
When you shop for a low electric rate, you need to know that your electric supplier will stand behind that rate, and can weather the inevitable bumps and shocks to the wholesale market.