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Electricity Rates for Small Businesses

As a small business owner, you know there is nothing small about the decisions you make. Hiring the right people, marketing your goods and services, and managing costs are all critical to your success.  For most business owners, finding a low electricity rate can make a huge impact on your bottom line.

The retail electricity market can seem crowded and confusing. Prices change frequently and you are approached by a steady stream of brokers and electricity providers.  Whether you use a broker, shop online, or search for low electricity rates on your own, you will find that rates can vary quite a bit.  Checking with fellow business owners will also reveal a wide range of prices for what seems to be the same basic service.  Here is a brief overview of why electricity rates vary as much as they do.

Price Differences between Businesses

Why do electricity prices vary between business customers? There are three primary components that electricity providers take into consideration when pricing a customer.  The first is how the business uses electricity.  This includes usage patterns during the day, weekdays versus weekends, and seasonal variations.  Businesses using more electricity during peak usage periods will see higher prices.  For businesses located outside of Texas, the capacity assigned to the account by the utility is also a significant factor in determining the electricity rate.

The second pricing component deals with where the business is located. Transmission constraints are a big deal when it comes to pricing electricity for a business.  It helps to think of transmission constraints in terms of traffic congestion.  Road capacities limit how many commuters can drive into the city from the suburbs in a given amount of time.  Similarly, electricity congestion is a function of where power is generated, where it is needed, and how many transmission lines are available to get it from one place to the other.

The third component deals with the credit risk associated with the customer. Keep in mind that the electricity provider is going to purchase power in the wholesale market to back up its sales.  If the customer fails to pay their bills or closes up shop, the provider is stuck holding the bag on the unpaid or unused electricity.  Therefore, electricity providers typically run a credit check on prospective business customers.  They may also consider the type of business, how long the customer has been in business, and the length of the contract term requested. For example, a new restaurant seeking a three-year electricity agreement does not have the same risk profile as an established medical clinic interested in a 12-month deal.  Different risk profiles lead to different prices.

Price Differences between Electricity Providers

Now that we have discussed why prices vary between small businesses, we can take a quick look at why rates vary from one electricity provider to another. It must be the profit margin, right?  Margins definitely vary between electricity providers.  However, other items also contribute to price differences.

Consider an abstract painting displayed in a modern art museum. Two people looking at the same painting will have different views on its meaning, symbolism, and emotional message.  The wholesale electricity market is much like an abstract painting.  Two electricity providers staring at the same market data will arrive at different conclusions as to what it means to them.  While providers will generally offer similar prices, there are always a few that stray from the pack – both higher and lower.

Some retail electricity providers are more conservative while others have a greater appetite for risk. An electricity provider may have an advantage in the market that reflects in their pricing.  Sometimes they need to achieve a particular sales goal and are more aggressive in their pricing assumptions or margins.  Simply put, on any given day, someone wants your business more than someone else does.

Making a Choice

When shopping for electricity service, you should focus on identifying the fair market rate. You might want to consider using the services of an electricity broker to compile a list of offers. If you have a list of five of more electricity rates for your business, you should notice a clumping of rates.  This clumping most likely reflects the fair market rate.  This will serve as your baseline for comparison.

You may also notice a couple of quotes that fall either above or below the rest of the pack. The lower quotes should be carefully reviewed to make sure there is not something unfavorable in their terms and conditions.  You should also check that the electricity providers with the lower rates do not have excessive complaints or unfavorable reviews.  If everything checks out, grab the lower rate and chalk it up as your reward for shopping.  If you are unsure, pick one of the electricity offers closer to the fair market rate.  In this case, your efforts should at least give you comfort knowing that you made a solid selection.

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