Your Electricity Pricing Options

Posted April 04, 2016

Options for Your Electricity Bill

Many customers are eager to find ways to reduce their electricity bills, and one of the most effective ways to save up to 30% on your electricity costs is to buy your electricity from a different supplier.

Unfortunately, it can be quite difficult to understand what alternative option is best for your home or business. This is largely because the best alternative depends on how you are currently paying for your electricity and what market you are in.

When EnPowered enters a market, it looks at all the options available in the market and finds the best available option for homeowners and small businesses. It then creates a group-buying model to help its customers get the lowest rates for that type of plan. In other words, we will do the work of making sure that you are getting the best rate for your specific needs.

EnPowered is working hard to enter new markets, and as we do so we will create targeted guides to help you understand exactly how to save money in each market. This article serves as a general guideline on the options available across all deregulated energy markets, and can be used to help you understand your options, as well as which alternative electricity option is best for you.

In nearly every market, regardless of where you are, you will generally have a default supply rate provided by your local utility. If you are not sure what you are paying right now, chances are you are with your local utility paying your default rate. If you are in a deregulated energy market, you can choose a different rate for your electricity from independent energy retailers. To see which markets are deregulated, see our earlier post on Energy Deregulation

These retailers are only responsible for changing the price that you pay for the electricity supply itself; you will keep receiving the same emergency services and support from your utility. As a result, many customers are paying more for their energy than they could be paying if they were to switch.

Understanding Your Bill

To understand exactly what portion of your bill you are able to control, it is helpful to first explain how your bill is broken down. Although pricing is different in every market, most bills can be broken down into four main parts.

Electricity Supply Charge: This is the cost for the electricity itself. This charge usually makes up about 50% of the bill for most of us, and this is usually the most volatile part of your bill. If your bill goes up and down a lot over time, this is probably what is causing that to happen.

Delivery Charge: This is the cost of getting the electricity to your doorstep. This will include the Transmission costs to get your electricity from where it is produced to your region, as well as the Distribution costs to get your electricity through all the local lines directly to your doorstep.

Regulatory Charges: These can vary a lot from region to region, but this is usually a relatively small cost attached to your bill to cover the costs of managing the market. These fees will usually go to your local energy board, or the system operator in your area.

Taxes: These will also vary from region to region, but are generally the sales taxes charged in your area.

Regulatory charges and Taxes are pretty stable but the Supply and the Delivery costs are far more volatile. You are usually only able to control the Supply cost portion of your electricity bill.

When looking at how to control your energy Supply cost, the many options in the market can seem confusing. Every retailer in the market will charge a different rate, and will often even have a unique plan for their customers. In general, though, the alternative pricing options available in the market fall into one of three pricing types: flat payments, fixed rates, and variable rates.

Standard Retailer Options

Flat payments: This is the simplest option, but it is only available in certain regions and usually only for residential customers. With this plan, you pay a certain price every month (i.e., $50) regardless of how much electricity you use. This option is ideal if you are a homeowner that is looking for stability to be able to budget your expenses, but it can lead to you over-paying over the course of a year.

Fixed rate plans: With a fixed rate plan, you are able to lock in your energy rates at a set price. In this way, you are able to predict your energy costs in advance and are no longer at the whim of the markets. These plans can vary in length from only a few months to up to five years in length. Similar to locking in low interest rates, fixed rate plans allow you to lock in low electricity prices for years to come, allowing you to gain control of your costs.

Variable rate plans: With a variable rate plan, you will pay a different rate each month based on what the market rate for electricity was that month. Variable rate plans are usually calculated as the market rate plus a small admin fee that is paid to the retailer. For example, a plan may offer the average market price plus one cent per kWh. Similar to variable interest rates, these plans can become quite cheap if prices drop, but also leave you open to the risk that prices could rise in the future.

So What Does this mean to you

Understanding which of the three types of alternative pricing plans makes sense in your market depends on how you are currently paying for your electricity. Every country, every state, and sometimes even every utility has a different way of charging for their electricity.

We have listed the five most common ways that your utility is likely charging you for your default supply, and for each one we have listed which alternative is generally best for you.

Flat rates

What is it: This is the simplest and also the most common type of rate. Every few months, or sometimes only once per year, the utility sets a new price for electricity. This price will be stated as a certain number of cents per kWh that you use.

The problem: This price is very simple to understand but will not reflect the market costs for electricity and can lead to consumers overpaying for their electricity.

Recommendation: A variable plan will often allow you to more closely match the true cost of the electricity market and pay less over the long-term.

Flat Rate Alternative

Tier Rate plans

What is it: These rates are very similar to flat rates, only they are broken into separate tiers. For example, the first 750 kWh consumed that month will be charged at 8 cents per kWh, and thereafter every kWh will be charged at 10 cents per kWh.

The problem: Again, this price is often very simple to understand but will not reflect the market costs for electricity and can lead to consumers overpaying for their electricity.

Recommendation: A variable plan will often allow you to more closely match the true cost of the electricity market and pay less over the long-term.

Tier Rate Alternative

Seasonal rates

What is it: These rates are very similar to flat rates, only the rates change between the seasons as demand fluctuates, usually between winter and summer.

The problem: The utility will often charge much more for the electricity during the summer to try to incentivize users away from using electricity, often charging much more than market rates.

Recommendation: In these markets it can make sense to get a fixed rate plan to lock-in low rates during the winter before rates rise in the summer months

Seasonal Rate Alternative

Variable rates

What is it: In certain markets, the utility will simply pass on the cost of electricity to their customers. This is usually only done for larger businesses and is rarely done for residential or small business customers.

The problem: In some markets prices are on the rise, and staying on a variable rate will lead to you paying more in the long-term.

Recommendation: In these markets it can make sense to get a fixed rate plan to lock-in low rates before prices rise

Variable Rate Alternative

Time-of-use pricing

What is it: The central premise of Time-of-Use pricing is that you will pay a different price for your electricity depending on when you use your electricity. Although many markets are different, most will have two or three time-of-use periods, for example:

  • Off-peak, when demand for electricity is lowest (i.e., 7pm – 7am)
  • Mid-peak, when demand for electricity is moderate (i.e., 7 – 10am and 5 – 7pm)
  • On-peak, when demand for electricity is highest (i.e., 10am – 5pm

The problem: Homeowners, and especially businesses, that need to use electricity during the day will often pay very high rates with very little ability to get off these high Day-Time prices.

Recommendation: In these markets it will usually make the most sense to get a variable rate that will allow you to pay the same rate regardless of what time of day you use your electricity.

Time of Use Rate Alternative

Things to look out for

Unfortunately, as in any industry, not every company in the energy retail space operates fairly. EnPowered works hard to ensure that its contracts are fair to its customers, but if you are looking to sign with a different retailer plan there are a few things that you should look out for.

Hidden fees: Sometimes companies will try to sneak hidden fees into your contracts, such as adding an additional delivery charge or membership fee to your contract.

High cancellation fees: Some companies will charge extremely high cancellation fees to keep you locked-in to a contract. Some fees are to be expected, but they should be reasonable. This cancellation fee will usually be worded as a few cents/kWh remaining in your contract. The industry average fee is already quite high at around 0.5 cents/kWh, so be wary of any contract charging a higher fee than that.

Really long terms: You should always understand how long your contract will be for. Many companies will sign you up for long-term contracts, such as five year terms, at higher rates. Unless you are looking for a long-term contract, EnPowered would normally recommend no more than three year terms.

Auto-renewal clauses: A lot of companies will try to automatically renew your contract at the end of your term, make sure that you have the ability to cancel your contract in such situations.

This article is meant to be a general guideline of the options available in the market, and what options you should take advantage of to reduce your energy bill. If you are wondering whether or not you are able to choose one of these alternative options in your market, or if you are curious about how the market works, we have written a post about Energy Deregulation. We have also written a post about your Natural Gas options for those who are looking to control their natural gas costs.

Exploring your options in the energy retail market is a great way to take charge of your energy usage and to reduce your electricity bill. If you want to know more about exactly what options are available in your market, we will be working hard to create targeted articles for each market on our blog.