Across America, consumers are preparing to be socked in the wallet from rising electricity bills , according to an article in The Wall Street Journal , with double-digit rate hikes up to 30% from New Jersey to Oregon. The culprit? Unabated rises in natural gas and oil prices . Natural gas climbed to near $11.50 last week, about 50% higher than it was in December. Oil has passed $125/barrel with Goldman Sachs predicting $200 oil within the next two years. That means it costs more to produce electricity , and in most states, those fuel costs are directly passed to consumers.
In Texas, things are different. Power prices are still rising, but energy companies can’t automatically pass higher costs through to customers unless customers are on a certain type of contract. Instead, business owners can choose how they want to deal with the risk of high electricity rates and can shop around for a deal that suits them. Competition among energy suppliers allows business owners to leverage their buying power to get a better electricity rate.
Each product has a trade-off. Locking-in a fixed-price for 12 or 24 months would give a business owner budget certainty and avoid any run-up in energy prices over the length of the contract. But a fixed-contract also prevents businesses from getting cheaper rates if energy prices subsequently decline. Not signing a fixed contract, though, exposes a business to wild swings in electricity rates , including wholesale prices in the thousands of dollars.
It’s always a tough question, but the current energy climate makes things even more difficult. Prices are at record highs, and no business owner wants to lock-in a rate at the height of prices. But prices also show no sign of letting up, and choosing a fixed-price now might be the safest option in the long-run.
Making the situation even more urgent is that summer is right around the corner, when prices are usually at their highest. This means businesses should start shopping around now before prices really spike from greater demand to run air conditioners, to avoid a nasty jolt when they open their first summer bill.
And based on where energy prices are going, it could be a bad summer for business owners.
The wholesale market price for most of Texas broke the bank in April, reaching unprecedented heights for a cooler month where prices typically moderate. The trend doesn’t look good for price relief either.
The wholesale prices, called the Market Clearing Price for Energy (MCPE), are divided into four zones with each having a different price that varies throughout the day. Customers can choose to buy on the MCPE to avoid missing out on price downturns, but they have to accept the risk of big spikes too.
April saw the MCPE depart wildly from historic norms, with the average MCPE for the month ranging $20 to $30 above typical levels depending on zone.
For example, in the South Zone, the average MCPE for April was $76 per megawatt-hour, compared with only $56 in April 2007. That’s a 36% jump.The situation was worse for the Houston Zone, which typically has higher prices because it’s tough to import cheaper electricity into the area. The average Houston Zone MCPE for April was an incredible $91 per megawatt-hour, a whopping $33 or 57% above the April 2007 price.
And all those prices are monthly averages , meaning that throughout the day, the MCPE can spike to staggering levels in the thousands of dollars. Just last week, the Houston Zone saw prices during the day hit $1,500 with prices in the South Zone clearing $2,300.
What this means for business owners depends on how they buy electricity. Business owners can escape directly paying those high and volatile MCPEs by contracting for a fixed-price from competitive energy providers.
However, business owners that have chosen to buy on the MCPE must pay based on the floating wholesale prices, which can be risky. Businesses have to accept the potential for large spikes on their electric bill if the wholesale price reaches thousands of dollars just for very short intervals.
If current trends continue, average summer MCPEs could exceed $100 per megawatt-hour.
With that possibility, business owners with all but the largest risk appetite should shop for a fixed-price deal they can live with to guard against being caught in a volatile summer market. Business owners may want to seek a term shorter than one year just to get them through the higher-priced summer period and test the market again in the fall.
That strategy would avoid the volatility and risk of month-to-months deals while still preserving a shopping opportunity should energy prices recede from current levels.