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Essentials First, Then The Fun Stuff

Commercial air travel and retail energy are two deregulated industries that have travelled very different paths. Consolidation of commercial airlines has greatly reduced the number of carriers serving various markets. Services once considered basic and complimentary have evolved into costly pay-per-service upgrades. The retail energy market, however, is evolving quite differently. Even with merger and acquisition activity, there is a constant influx of new market entrants. Furthermore, staid utility service has been replaced with myriad opportunities for retail customers to make their homes more energy efficient, reduce their carbon footprint, or contribute to their favorite charities.

With a wide selection of retail electric suppliers compounded by a dizzying array of plans, it can be confusing for consumers to find the plan that best fits their needs. To help separate the steak from the sizzle, keep the following essentials in mind when selecting a retail electricity plan: supplier, rate structure, and term.

Choosing a Supplier

When the Texas retail electric market opened in 2002, much was made of choosing an energy provider that was large, established, and well-capitalized. The concern was that smaller suppliers, even though they met PUC licensing requirements, were more likely to default and leave customers with the dreaded Provider of Last Resort (POLR) for a month or two. The reality of the market is that very few retail electric providers have failed. New rules were also passed to allow customers to switch away from the POLR almost immediately. Therefore, choosing a new electric provider is not so much about size as it is about service. There simply is no way to create a perfect experience for a market where customers have such diverse expectations. However, retail electric suppliers that consistently deliver quality service are the ones you want to work with.

Electricity Rate Structure

The general categories of rate structures are fixed price, variable, and time-of-use. The choice between fixed price and variable rates come down to budget versus flexibility. Having a fixed price protects you from changes in wholesale energy prices or other market price fluctuations. Only changes in law or market structure would allow the retail electric provider to change the rate. On the down side, if you discontinue service during the term of the agreement, you will be assessed an early termination fee. This fee would not apply if the discontinuation was the result of moving to a new residence.

The main advantage of month-to-month variable plans is that you can discontinue service without penalty. This might be a good strategy if you do not want to lock into a fixed term. However, the rates can fluctuate and could leave you with some sticker shock. They have their place but be sure you understand the risk you are taking.

Finally, time-of-use plans are a special type of fixed price plan. In exchange for free electricity or reduced rates during nights or certain days, you pay a much higher rate for electricity usage during all other times. These plans might make sense if you can switch enough usage to the discounted/free periods. Give these plan some thought before jumping in.

Electricity Plan Term

Term is an interesting element to consider. Standard terms for fixed price plans are in 12-month increments. Longer terms are typically more expensive because the retail electric provider is taking on more market risk. Market liquidity for electricity is very limited beyond 18 months which results in higher hedging costs for retail suppliers.

Other than the 12-month increment offers, you will often find what are referred to as season-advantaged or sweet spot offers. For example, an 8-month term beginning in October benefits from omitting the more expensive summer months from the rate. Of course, this puts the customer back in the market just as the summer begins. This might not be a bad strategy but the customer should keep this in mind when selecting this type of term.

Another factor to consider is the hassle factor. If you continually select 3-month terms, you might find yourself in a constant state of shopping for a new electricity supplier. As streamlined as the shopping and switching process has become, this is a serious commitment of time. While not a deciding factor, consider how often you want to be in the market.

Once you have taken care of the essentials (supplier, rate structure, and term), you can customize the plan with special attributes to fit your needs and interests. Renewable energy plans, plans that support worthwhile charities, smart thermostat plans, and many other options are available. Some plans come with enrollment incentives like gift cards. Some are tied to loyalty programs or give you a rebate if you consistently pay your bill on time. There are even a few plans that just provide you a low rate and stellar customer service. Regardless of which special attributes appeal to you, make sure you focus on the essentials first.

About: Charlie Hewitt

Charlie Hewitt has more than 25 years of in-depth energy experience having served in executive and managerial roles at some of the largest retail energy providers in North America.His expertise covers a wide range of retail energy disciplines including pricing, contracting, risk management, and credit. He holds an MBA from UT Arlington, MA and BS degrees in geology from UT Austin, and was a TXU environmental research fellow.

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