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Is a fixed-price natural gas or electricity contract likely to save money?

These types of contracts are often marketed to homeowners to save $$ on their utility bills. When would such a contract make sense for a homeowner?

What are the "gotchas" for these types of contracts?

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    Is this question talking about a fixed unit rate (per cubic meter, kWh, etc), or a fixed monthly rate? – alexw May 21 '16 at 3:38
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In my area, the fixed prices are based on an average. My gas company will look at my previous months (six months if I remember correctly) payments and give me an average based on that amount. Then I am contracted for a year based on that average. If I lower my costs, I'm under contract and will not see the savings but if I go over for some reason, I will save money there.

It really depends on how your utility companies work so I would check with them, look at your previous billing cycles and determine if the plan will possibly save you money. Of course some things can't be planned for such as the economic downturn like someone else mentioned.

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I can only speak to natural gas but I imagine the answer for electricity is the same.

In general, yes, it is better to lock into a fixed price contract as in the long run, natural gas prices increase over time. However, if you locked (signed a fixed price contract) in prior to the economic downturn, most likely you were better off not doing so but the key is long-term.

http://en.wikipedia.org/wiki/Natural_gas_prices

However, do your research as fixed priced contracts vary considerably from company to company.

http://www.energyshop.com/

I think it's a good time to sign a fixed-term contract right now as I don't see prices coming down much further with global economies are now recovering from the downturn.

HTH

  • Cart, is that link for U.S. as well as Canada? – Zephyr Dec 16 '09 at 16:43
  • The Energy Shop link is for Canada. – Cart Dec 16 '09 at 16:54
  • But, consider that you can't lock in at prevailing cash rates for the commodity: there's always a price premium to locking in. Even if prices will rise, initially, one will be paying more for the commodity, until the price has risen substantially higher. Do you think the price premiums for typical natural gas contracts nowadays (e.g. lock in for 5 years) are less than the average future price over the same period? – Chris W. Rea Dec 16 '09 at 17:49
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    In other words, it's not enough to be right in saying that "gas prices will rise" -- it's by how much they rise in the time period that will make this decision wise, or not... – Chris W. Rea Dec 16 '09 at 17:50
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    I'd imagine most the premium I'm referring to is straight markup / profit, as opposed to carrying, interest, or storage charges. These guys are in it to make money, not break even :-) – Chris W. Rea Dec 24 '09 at 13:28
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I have some numbers to share that may help. I've been tracking my home's natural gas consumption in a spreadsheet for years. Much of that time I'd only been interested in the quantity used – to measure my home's efficiency after certain upgrades – but in 2006 I also started tracking the "Gas Supply Charge" costs from my local utility, Enbridge, in Ontario, Canada. My numbers are for the gas commodity only (i.e. excluding delivery and customer charges.)

I've never been on a fixed-price contract, so the numbers are supposed to be reflective of market rates. However, the numbers do differ from real "spot prices" because Enbridge estimates gas costs up-front and then applies a "gas cost adjustment" at later dates if their estimate was wrong.

Natural gas cost per cubic meter for Chris's home http://img686.imageshack.us/img686/6406/naturalgascosts3priorye.png

Since 2006, natural gas prices have been generally falling. The last cost I have on file, from my November 2009 bill, is 12.9 cents per cubic meter – being ~20 cents gas supply rate, less gas cost adjustment of ~7 cents. My average cost over that nearly 4 year period, January 2006 through November 2009, was 38.4 cents per cubic meter.

Considering the current 5-year fixed rate I found is about 29 cents per cubic meter, there is a substantial premium to locking in when compared to current market rates. However, one can see that during the last 4 years, market prices did substantially exceed that rate for quite some time. Furthermore, when I last looked at those 5-year fixed rates perhaps a year or more ago, I couldn't find a company charging less than 39 cents per cubic meter. So, contract rates have fallen as well.

Consequently, if we are at a natural gas price low and the economy is to recover, I tend to agree with Cart's answer and suggest it could be a good time to consider a fixed-rate contract. But, do your own due diligence and read the fine print if you go for it.

UPDATE: In the interest of full disclosure, shortly after I did my own research above, I signed up for my first ever fixed-rate natural gas contract. :-)

  • p.s. here we are 2.5 yrs later and, my bad luck, prices have remained low. :/ – Chris W. Rea Jun 21 '13 at 13:39
  • It looks like ImageShack has since erased your original image and replaced it with an advertisement. Do you happen to have a copy of the original lying around somewhere? – Aza Aug 25 '15 at 6:30
  • Update: I wasted money over the lifetime of my fixed price natural gas contract. Natural gas prices declined below my contract rate and remained low in comparison to levels reached between 2006-2009. – Chris W. Rea Feb 16 '18 at 21:49
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The answer to this question will vary considerably by state and how utilities are regulated in your area. In New York, ESCOs (Energy Supply Companies) are almost always a ripoff for consumers versus the old-style regulated utility (in NY the utility supply markups are tightly regulated, but ESCOs are less regulated).

You also need to really understand the marketplace rules for "locking in" a price. If you can lock in the July price for natural gas for a year, that rocks. There are other factors as well. But even then its a real bet, since weather and supply factors can have a dramatic effect on gas prices in the winter.

IMO, the best bet is to run with the market rates and bank the efficiency improvements that you build into your home over time. Some utilities offer "budget plans" that smooth out your payments without interest -- I'd recommend that route if predictable bills are your goal.

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I would argue:

  • If you think you know more than the company: Do it.
  • If you think the company knows more: Don't do it.

Because the company only offers you this if it can make money from it.

What you are basically doing is betting against the company.

  • They say: OK, if you pay that fixed price over the next 5 years we think, that in the end you will give us more money.
  • You say: I think the prices will rise so much, that it will be cheaper for me.
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    Hey. Predictability is sometimes worth it, even if you end up paying more than you would otherwise. It's a question whether you can withstand the risk of prices rising dramatically all of a sudden. – user296 Aug 20 '10 at 17:56
  • Of course. I myself would maybe do it just to be on the save side. But the question was: "Will it save me money" and I don't think that's very likely. – Plankalkül Aug 20 '10 at 18:02
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    Does the company only do it for profit, or because they are a regulated monopoly (in many US municipalities) and are directed to offer it? I honestly don't know. – MrChrister Aug 20 '10 at 18:32
  • That is of course another possibility but it is very likely they will add enough premium not to loose money it the long run. – Plankalkül Aug 20 '10 at 18:41
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The company or "supplier" makes money because your guaranteeing that their gas goes to your house for X amount of years. Hence the contract and ability to fix the rate. So the homeowner is locking in the price or "rate", while the supplier is locking in the customer, which in turn is good for both parties.

AW

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No, it's not going to save any money. In contrast, it's going to lose money.

Let me explain. If you buy a fixed price electricity contract, and the price of electricity skyrockets along with the price of Bitcoin. You are lucky to have the old low price. It makes sense to start mining Bitcoin, by increasing your electricity use, because you are paying too low price for the electricity.

If you buy a fixed price electricity contract, and the price of electricity crashes because a new energy-efficient technology generation of electricity-using household appliances has arrived to the market, you still pay the higher price. It makes sense to reduce your electricity use by buying more efficient household appliances, because you are paying too high price for electricity.

Or consider this: if you have the ability to charge your electric car at home and at work, and the workplace charges a hourly market rate for electricity, will you charge at fixed rate at home or at variable rate at work? You will select the cheapest rate, of course.

Your use of electricity does not follow the natural demand curve. If the price of electricity is artificially high (you pay more than it's worth currently), it makes sense to reduce your electricity use, thus deviating from the natural demand curve. If the price of electricity is artificially low (you pay less than it's worth currently), it makes sense to start mining Bitcoin / stop charging your electric car elsewhere and only charge at home.

The electricity company has to take into account this.

Similarly, the natural gas company has to take into account this. For example, if the natural gas price crashes, you still have to pay the old price, thus deviating from the natural demand curve. If the natural gas price skyrockets, you won't reduce your usage, thus deviating from the natural demand curve.

Because consumers can and will adjust their behavior as a function of price, what you're effectively buying is some form of insurance. It's not a futures contract (futures contract would apply if you were FORCED to use a certain amount of electricity / gas), it's an option, since you are not forced to use natural gas or electricity. Options have a price.

The electricity / natural gas company has to pay to the derivatives market to buy those options. Or if the counterparty is the company itself, they have to price the options correctly in their balance sheet, using the Black-Scholes model.

My take? I don't have natural gas where I live, but my electricity contract is based on hourly market price. It's the only sensible choice, even for those who don't follow the hourly market price. It will average out in the long run and be cheaper in the long run.

If I had a risk to insure against (example: electric heating in an old house in very cold climate where annual heating bill exceeds 5000 EUR), I might pay the extra price of a fixed contract.

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