Consumers in deregulated electricity markets have the power to choose from a variety of competitive offers. Top-tier electricity providers have prepaid plans, month-to-month plans, renewable energy plans, and time-of-use plans. Great electricity rates are even coupled with offers for web-enabled thermostats, home energy services, and warranties. For many customers, however, the fundamental question is which contract term to choose.
Choosing Electricity Plans
As with the answer to most situational questions, the answer is “it depends.” When shopping for electricity plans, consumers often face a fundamental choice between fixed price and variable price offers. Fixed price offers provide price certainty while variable price plans give the customer the freedom to switch suppliers or convert to a fixed price without penalty. In other words, there is a fundamental choice between peace of mind and flexibility.
For customers choosing fixed price plans, the next decision is selecting a term that suits their needs. The three basic choices are short-term deals (typically three or six months), odd-term offers, and annual plans. Short-term deals are popular with customers who want a degree of price certainty but do not want to commit to a long-term contract. Odd-term offers (e.g., 18 months) are usually designed to incorporate additional off-peak months to achieve a lower electricity rate. However, annual terms (12 months or multiples thereof) remain the most popular electricity plans with residential customers.
Annual terms appeal to customers for a variety of reasons. First, these terms offer a balanced blending of peak and off-peak monthly prices. Second, consumers are used to buying other services offered in yearly increments. Insurance, car loans, cell phone plans, and other services are commonly offered in yearly or multi-year terms. Furthermore, annual terms seem to hit that sweet spot with regard to how often consumers want to participate in electricity shopping.
Among the annual terms, 12 and 24-month terms are the most widely available. With so many electricity companies offering fixed price products with these terms, residential customers can easily compare multiple offers. But what about fixed electricity prices for longer terms? The market is seeing an increase in fixed price offers with terms ranging from 36 to 60 months. Consumers should consider the pros and cons of these plans when they shop for electricity rates.
Long-Term Electricity Plan Pros
Longer-term electricity offers have two clear advantages. First, consumers lock-in their price for a very long time. Guaranteeing their electricity rate for three to five years not only protects them from seasonal price variations, it provides price protection from longer-term market issues as well. For example, electricity prices generally rose from April 2012 to April 2014. Tracking with natural gas prices, electricity rates slowly returned to near April 2012 levels by April 2015. Customers enrolled in 36 or 60-month fixed rate electricity plans in early 2012 missed that pricing roller coaster.
The second advantage of longer-term electricity offers is simply reducing how often consumers shop for electricity rates. Consumers satisfied with their electricity provider and rate sometimes prefer to keep things the same. Shopping for electricity every year or two does not fit the profile of every consumer.
Long-Term Electricity Plan Cons
There are also two primary disadvantages of enrolling in a longer-term electricity plan. The lack of flexibility is the most obvious disadvantage. Although some states, like Texas, allow residential customers to move without incurring contract termination penalties, there is no free exit provision if the customer is simply unhappy with the rate or quality of service. As long as the electricity provider fulfills the conditions specified in the contract documents, the customer must either maintain the service for the duration of the contract or incur an early termination penalty.
The second disadvantage of selecting a 36 to 60-month fixed price electricity plan is timing. A customer who locked in a long-term rate in January 2010 would have experienced buyer’s remorse for most of their contract term. Customers enrolling in April 2012 would have done very well with a 36-month electricity plan. One year and two-year plans may not provide the price certainty of longer-term plans; however, their shorter duration reduces the importance of when consumers lock in their rate.
Electricity Plan Shopping Tips
Consumers should keep these suggestions in mind to help make their decision a good one:
- Be careful about entering into a long-term deal without first-hand experience with the electricity supplier. In the absence prior experience, read reviews and ask friends and neighbors. Three to five years is a long time to endure subpar service.
- Understand that electricity market prices vary over time and that it is impossible to know if locking in a long-term rate on any given day is a good decision. Electricity consumers selecting these terms need to understand that their goal was price certainty rather riding with the market.
- Trading in the wholesale electricity market three to five years out is severely limited. The lack of trading activity results in higher risk premiums that ultimately are reflected in the consumer electric rate. Electricity providers can sharpen their pencils for one and two year deals but it becomes significantly more difficult to do so for longer terms. Consumers should recognize that locking in their electricity rate for longer terms might not look as attractive as shorter terms.
Three and five-year fixed price electricity plans are a great option for residential customers to consider when shopping for an energy provider. Guaranteed energy rates are one of the benefits of electricity customer choice programs.