Energy suppliers offer many different types of electricity rates, but they can be divided into 3 categories: variable, fixed, and custom rates. You might ask yourself “Should I lock in my electric rate, or remain on a variable rate and pay the market price month to month?” The correct answer for your business depends on how you use your electricity and how risk averse you are or aren’t.
What it means to “lock in” electricity rates
When you lock in an electric rate it means you are entering into a contract with an energy supplier where your electricity price per kilowatt-hour will remain fixed for the contract term. Like any other commodity, electricity is sold at varying rates depending on many factors like demand. When you lock in a rate, you pay that price no matter what happens to the price of electricity.
Fixed-rate contracts are for set periods of time anywhere from 6 months to 5 years. Fixed rates are the most common types of contract for businesses and are generally the best option.
When should I lock in my electricity rate?
Obviously the best time to lock in rates is when electricity is cheapest. Now, you may ask well when is electricity cheapest? To know when electricity is going to be cheapest you’re going to need to understand seasonality and the key factors that affect electricity rates.
The key factors that affect electricity prices per the U.S. Energy Information Administration are:
- Fuels: Fuel prices, especially natural gas and petroleum may increase during periods of high electricity demand and when there are fuel supply constraints or disruptions because of extreme weather events and accidental damage to transportation and delivery infrastructure. Higher fuel prices, in turn, may result in higher costs to generate electricity.
- Power plant costs: Each power plant has financing, construction, maintenance, and operating costs.
- Transmission and distribution system: The electricity transmission and distribution systems that connect power plants with consumers have construction, operation, and maintenance costs, which include repairing damage to the systems from accidents or extreme weather events and improving cybersecurity.
- Weather conditions: Extreme temperatures can increase demand for heating and cooling, and the resulting increases in electricity demand can push up fuel and electricity prices. Rain and snow provide water for low-cost hydropower generation, and wind can provide low-cost electricity generation when wind speeds are favorable. However, when there are droughts or competing demand for water resources, or when wind speeds drop, the loss of electricity generation from those sources can put upward pressure on other energy/fuel sources and prices.
- Regulations: All utilities and energy suppliers are heavily influenced by federal, state and environmental regulations on coal, oil, nuclear power and natural gas. In 2020 80% of the electricity in the U.S. came from these sources, with renewables (hydro, wind, solar, biomass, and geothermal) making up the remaining 20%.
The last thing you need to consider for your business is seasonality. Generally speaking electricity rates are highest in the summer/winter and lowest in spring and fall. In a perfect situation you would lock in your rate in spring/fall with a number of the above factors in your favor. In actual practice it’s rarely this simple but this should point you in the right direction.
The benefits of locking in your electricity rate
Most businesses in deregulated states compare fixed rates vs. variable rates and for many locking in rates make the most sense. Fixed rates are quite popular because of 3 main advantages:
1. A stable rate that isn’t affected by world events and market conditions
Getting a fixed-rate ensures you are paying the same price for the entire term of the contract. Market conditions and world events that cause the price of electricity to rise like the closing of the Keystone XL pipeline won’t affect you or the war in Ukraine.
2. Having a more consistent electric bill
With a locked in rate, the only thing that affects your electric bill is your total usage for the month. Businesses tend to use a similar amount of energy year to year so a fixed rate will make your bill more predictable and consistent.
3. Having a fixed-rate makes it easier to budget
Since businesses tend to use similar amounts of energy year to year, you can use this to more accurately budget your electricity expenses as your price per kWh will remain the same.
The best months to lock in your electricity rate
Generally speaking the best time to lock in your rate is during lower demand months in Spring (March-April) or Fall (September-October) under perfect circumstances.
Temperature and weather have a large effect on energy prices in general. In summer most consumers are using their a/c more, which can drive up demand. Some states get a lot of severe weather, like hurricanes, and tornados which can affect energy transmission. This can cause rates to rise.
Further up north, winter is a high demand time. The cold and ice can cause businesses to use more electricity or interrupt transmission.
In actual practice it’s not always best to wait until spring or fall as global events, regulatory changes, extreme weather, etc. can cause prices to rise. Ultimately, you have to factor in time of year with the current energy market to make the correct choice for your business.
Making the switch and locking in your electric rate
Here’s a couple tips to help ensure your business gets the best deal possible:
- Get 5 or more quotes or work with a broker who will get quotes from dozens of suppliers and relay the best rate to you.
- Stay away from suppliers that aren’t well established and are new to the market.
- Don’t sign a long term contract without considering where the market is likely to go over the next couple years.
- If you signed a contract previously make sure this new agreement starts after your previous one ends to avoid cancellation fees.
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