Posts Tagged Power Generators

Why do electricity rates spike for no particular reason?

Thursday, January 13th, 2011 | Permalink

A cheap electricity rate one day can become very expensive the next and this has to do with risk factors that effect the electricity companies and power generators that sell you electric service.

You may have chosen a variable electricity rate that was on what is known as the spot market or MCPE index and you may feel like you made a smart decision.

Then one day you get your electricity bill and you notice your electricity rate averaged 40 cents per kilowatt hour last month which is why you are getting a $2,000 electric bill compared to what was once much lower.

What causes a price spike like this?

Many things can cause price spikes in electricity markets because there are many risk factors that electric companies have to contend with. Below are just a few of the risk factors that can impact a variable electricity rate plan you may currently be on.

  • Market Risk – Electricity companies may pay a premium for power on the commodities market when natural gas and oil prices are at all time highs. This would not be the best price for electric power and variable electricity rate customers will see this risk past through on their electric bills.
  • Credit or default risk – Electricity companies may not get paid by their electricity service customers because they took on too many bad credit risk customers and many of them defaulted on their bill. The electricity company will make up for this by hiking up your electricity rate.
  • Operational risk – The electricity company you chose may have a bad software and billing system to track customers, manage energy purchases and hedges and collect on payments. If a large enough loss is realized because of mismanagement in this area the electric company may raise your variable price to make up for their short fall.
  • Quality risk – Last year an electricity company offered a variable rate and advertised it as a cheap electricity rate plan that follows a commodities market. The product ended up not meeting this guideline and went up even when the market was down. The electricity company was simply passing on risk to the customer to meet their profit requirements while sacrificing on quality of product being offered. This rate plan obviously did not meet the quality standards as outlined in their ads to customers.
  • Storage risk – In Texas electricity is generated at peak times by burning the commodity of natural gas that is in storage in salt domes throughout the state. These salt domes can only store so much of this commodity. If natural gas is in short supply electricity rates can go up among all electricity companies simply because their is not enough raw energy resources to produce electricity to come to your home or business. More expensive power plants and demand curtailment options have to be employed and this price is past through to all customers on variable electricity rate products.
  • Model risk – Pricing models are created by electric companies that are used to forecast prices and profits. These models can sometimes be inaccurate and the provider may find themselves in a fix for predicting wrong. The risk in this situation gets passed on to their variable electricity customers already signed up with them in a price spike.
  • Legal risk – Last year several electricity companies in Texas went out of business and some of the people in charge left the state to hide out and avoid paying penalties, fines and lawsuits. The companies went out of business because of liquidity and model risks when commodity prices had risen to historical levels. These companies bet on prices without protecting themselves through hedging and proper execution. The customers were dropped, they did not get their deposits back and they had to sign up with a new provider while electricity price were at historically high levels.
  • Liquidity risk – This risk involves not having the backing necessary to make large energy commodity trades and hedging. Hedging is necessary to protect the price electricity customers pay so that it stays within a certain threshold. Without being able to hedge if an electricity company promises a rate will not go beyond a certain price they may not be able to fulfill that promise if commodity prices like oil and natural gas go up in price.
  • Political or regulatory risk – This risk is associated with US and state political regulatory changes to pricing structures completely regulated by the government. These changes can effect the price people pay for electricity which may happen if Global Climate Change legislation goes through and companies are forced to add a carbon tax. This risk affects all electric companies and customers and there is no way to protect against it. A forecast of over 30 cents per khw hour for electricity is seen if this type of legislation is past.

Rather than choose a variable electricity rate consider going with a fixed electricity price. You have price predictability and assurance that you will pay the same rate for the term of your energy contract.

Please use the sign up form above to have an energy consultant work with you on finding the best available rates in your area.

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