Posts Tagged no deposit electricity companies

Credit risk and why electricity suppliers want a large deposit

Thursday, January 13th, 2011 | Permalink

When an electricity company asks you for a large deposit it can seem unfair especially considering many people have just finished up paying a large deposit for their home or apartment lease.

Most traditional electricity companies sell you electric service without demanding a large upfront payment. If your credit is bad these electric companies will ask you for a deposit but they still will wait to charge you for your electricity consumption after 30 days of you using their electric service.

If you think about it you actually may have 30 – 45 days to pay your electric bill during some billing cycles and what products can you buy that allow you that many days to pay for something you have already used?

Even still, although you get to wait 30 days to pay your electric bill the large electricity deposits are out of many peoples budgets. These deposit amounts can range between $200 – $500 for residential customers and can be several thousand dollars for commercial and industrial businesses.

Often times you will not see that deposit money back for a good 6 months to 1 year or until your credit score drastically improves.

In the same way you must contend with credit issues and deposit amounts many of the electricity companies that sell you electric service have to deal with the same thing.

When a power generator sells power to a local electricity company in your area, it will deliver the electricity power to the utility and wait for payment which may be 30 days later.

During this 30 day period the power generator assumes the risk that the local electric utility may not pay their bill for the power they sent out to your home or business.

The power generator is exposed to even more risk considering in states like Texas energy prices are extremely volatile. During that 30 days there could be a drastic shift in the cost to generate that power at a steam driven natural gas power plant.

Because electricity markets are regulated some of the power generation facilities may not be able to pass on an energy commodity price increase on to their customers.

If the local electric utility company does not pay their bill after that 30 day wait period it can have a cascading effect causing a series of defaults throughout the energy cycle.

Because of the series of business events that take place to make sure people receive electric power to their homes and businesses everyone has to pay their bill on time.

The risk is spread out in regards to credit by having thousands of electric service customers who don’t meet a credit score requirement post a large deposit.

There is over a 50% default rate among those in a certain credit score range and you would be surprised to know that score number isn’t even all that bad.

Because of the likely hood of customers defaulting on their electric bills thousands of us post deposit amounts to our electricity company.

These deposits limit the amount of risk to the electric company and not only allow them to continue to make a profit but to simply keep their doors open.

Due to thin profit margins associated with the sell of retail electricity service deposits are a necessary evil as much as we all hate them.

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Electricity Suppliers