You have worked hard to build your business and make it profitable. Along the way, you mastered marketing, cost management, and cash flow. Electricity may be a significant part of the variable costs of running your business. Do you have to become an expert in choosing a commercial electricity plan to get a good deal? Fortunately, finding a great electricity rate is not nearly as difficult as it seems.
Today’s energy market is relatively tame compared previous years. In the past, price volatility made it difficult to know when to lock in your electricity rate and for how long. With prices stable and at historical lows, the time is right to lock in your electricity rate for as long of a term as possible.
Natural Gas Drives Electricity Prices
Natural gas accounts for a significant and growing percentage of electricity generation in the United States. Once used as a marginal fuel for power generation, natural gas has become the preferred fuel source. Shale gas development has resulted in abundant cheap supplies of this domestic fuel resource.
As shown in the chart above, natural gas futures prices are low and relatively stable. The days of $8/mmBtu (and higher) gas prices seem like a distant memory. As shown on the chart, natural gas futures prices generally fall between $2.50-$3.30/mmBtu for well past the next decade. This presents an unprecedented opportunity to lock in low commercial electricity rates.
Electricity Offer Terms
In the past, it was common to see commercial customers lock in their electricity rates for terms ranging from one to five years. For small businesses, a 36-month electricity agreement was often at the top end of the range. Given the current market conditions, there are reports of some commercial customers locking in electricity rates for terms of seven to ten years.
With very little price volatility, electricity providers are changing their strategy for bringing value to commercial customers. Complex pricing structures were once viewed as a way for sophisticated commercial customers to manage their electricity prices. However, with the market so stable and near historical price lows, simple fixed-price rates may be best.
The risk to customers is easy to conceptualize. There is little room for electricity prices to decrease. The benefit of natural gas prices falling to $2.00/mmBTU is insignificant compared to the risk of prices increasing to $4.00/mmBTU or higher.
Credit Impacts Term
Based on the discussion above, should all business customers should seek out 10-year fixed price electricity agreements? Unfortunately, there are some limitations to securing a long-term electricity rate. The biggest factor involves credit.
Credit is king when it comes to finding a long-term electricity deal. First, the electricity provider must have adequate credit to hedge its supply needs in the wholesale power market. Not every electricity provider has the financial strength to do this. You may have to search for providers who are open to longer-term fixed price electricity agreements. A commercial electricity broker can be helpful in this case. Good brokers know which providers are offering longer-term deals and what types of customers are qualifying for those terms.
Second, your business credit rating is critical in securing a long-term electricity rate. While some electricity providers will check credit reporting agencies, long-term deals may require a deeper dive into your financials. With the exception of public entities like schools, water districts, and municipal governments, you will probably be required to disclose your audited financial statements. Not every small business has audited financial statements so this can be a problem. In that case, you might be able to offer unaudited financial statements or financial references to push for a four or five year electricity term. It may feel like an intrusion to share this information with an electricity provider, however, the benefit of locking in low electricity rate for a longer term may be worth it.
Consider Business Changes
The one constant with business customers is that their needs are dynamic. Businesses grow, shrink, add locations, sell locations, and move. The longer the term of your commercial electricity contract, the more likely your business will change during the term of the agreement.
When considering electricity offers greater than 24 or 36 months, be sure to contemplate your changing needs. Seek clarification for how these changes are addressed in the contract. For example, are you constrained by monthly electricity usage estimates? What happens if you relocate your business? What happens if you close your business prior to the end of the agreement? We have discussed these changes to commercial electricity agreements before. However, they are much more important when you are looking at long-term electricity deals.
In summary, the strategy is simple. Lock in a fixed-rate electricity agreement for as long of a term as you qualify. Keep potential changes to your business in mind and be open to a thorough credit review. Once have your agreement in place, you can get back to running your business knowing that your electricity costs are low and locked-in.