Buying from the Utility Company versus a Third- Party Supplier.
Both options are regulated by the Public Utility Commission (PUC) of your state. The Utility Company owns the infrastructure, the pipelines or powerlines, and the meter on the outside of your building. Generally, they purchase energy as needed at market rates. Since the utility company is restricted from making a profit on the supply of energy, they have little incentive to focus on buying more of it when it’s cheaper.
Third-party suppliers on the other hand are competing with a whole bunch of other third-party suppliers. It’s all about who buys it cheaper. I’ve known some suppliers with very deep pockets to purchase electricity contracts when prices dip. They build an inventory of these contracts and sell from this inventory. When the market goes up they have a significant advantage over the supplier who has to buy electricity at a higher current market price. If you, the business consumer, could identify which company bought at the lower price, wouldn’t that be a big advantage? (More on that later)
Since electricity and natural gas are commodities, nobody sells special electricity or more potent natural gas, it is all the same. Would you rather buy from someone who is focused on buying it cheaper or from the utility that simply buys at market rates? I’m going with the one who wants it cheaper! The majority of businesses in deregulated markets buy their energy from a third-party supplier.
Buying a Fixed versus a Variable Rate Contract
If you’re buying from the utility company, you’re buying a variable rate. If you buy from a third-party supplier, you have options.
Let’s keep this simple. A fixed all-inclusive price means you pay the same price per kWh or therm for every kWh or therm you consume. A variable rate will fluctuate based on market conditions.
A variable rate has you taking on more risk. Things beyond your control such as infrastructure collapse, weather conditions, high demand, could cause prices to spike. A fixed price gives you control. You know what you’ll pay for each kWh or therm during the entire term of your contract.
As a business owner you buy insurance to mitigate risk. It’s true you could pay a bit more on a fixed contract if prices went down. Consider a fixed contract as mitigating risk.
We had clients in Texas last February when winter storm Uri blew in from the Arctic. The entire electric grid was in jeopardy. Windmills froze. Natural g as well heads froze. A nuclear power plant was shut down due to frozen pipes. Prices for electricity skyrocketed. During the storm, the price for a kWh of electricity capped out at $900 per kWh. Some consumers exposed on variable rate contracts received monthly billing statements for tens of thousands of dollars. Large businesses that consume a lot of energy were getting six figure electric bills. Our clients on fixed rate contracts continued to pay $.06 cents per kWh.
Ouch! Don’t make this mistake!
It really surprised me over the years; most businesses don’t manage their contracts very well. Perhaps they think the energy supplier will let them know when their contract is going to expire. That’s generally not the case. Most energy supply contracts have some clause that deals with pricing after your fixed rate contract expires. First thing that happens, you will be switched to a variable rate and the supplier can increase what they charge you above and beyond what the market rate is for that month. Unfortunately, we see this too often when we first engage a new client that is out of contract. It’s common to see them being overcharged 30-50-100%. One of our most outrageous examples was a small municipality that had been out of contract for four years. When we did our initial evaluation, we discovered they were paying $.36 cents per kWh. When we completed our bidding process, we obtained pricing at $.07 cents. That’s a 400% higher rate than they should have been paying simply because they continued on a default rate after an expired contract. We don’t let that happen to our clients. Ninety days before their contracts expire we start the bidding process again, insuring we keep them in best energy pricing, on and on, year after year.
Another mistake we see is electricity contracts ending in the middle of summer or natural gas contracts ending in the middle of winter. This is simple to fix. Instead of doing a 12, 24, or 36-month contract, structure the term of your contract to end in the fall. If your contract ends in a high demand season you’re always renewing at a time when energy rates are high. You want your contract to end when demand is historically low. That’s the season when prices will be low.
More on that Later
Remember my earlier question; if you, the business consumer, could identify which company bought at the lower price, wouldn’t that be a big advantage? Avion Energy got its start in July of 2010. We set out to create a system whereby we could find who had the best price for our clients. We’ve built the largest network of third- party suppliers, all willing to bid on our platform of competition (over 80 suppliers).
Depending on the utility company and which of our suppliers are licensed to do business in that state, we may have 12-15, perhaps even 20 suppliers bidding on our client’s energy supply. You’d think their prices would be very close. They know they’re competing for the business. However, it’s very common to see a 25-35% spread between the lowest and the highest price! Business energy consumers just don’t realize this. If they subscribe to standard business practice and get 3 bids, they’re not likely to find the best price. Let’s face it, no one in upper management is going to task an employee with getting 17 price quotes that all have to be delivered the same day to be an apple to apple comparison. It requires some form of technology to perform such a feat. So they settle for 3 bids, and settle for paying a higher price than what might be available. Our clients leverage our proprietary technology; they see the price quotes from all the competing energy suppliers in an apple to apples comparison. They clearly see who has the best price for electricity or natural gas and can make a well-informed choice.