THE SAVVY BUYER S GUIDE TO DEREGULATED ELECTRICITY

Transcription

1 THE SAVVY BUYER S GUIDE TO DEREGULATED ELECTRICITY NAVIGATING THE MAZE

2 Whether you re new to buying electricity or you re a seasoned veteran, you might be surprised at how tough it is to tackle this complicated task. The deregulated market in Texas is great but it s especially great for the educated buyer. In fact, buying electricity today is kind of like playing the stock market. If you don t do your research, study price changes over time, and keep a constant eye on upcoming laws and policies, you re likely to miss out on thousands of dollars in savings. How can you know if you ve made a good decision or that your company isn t missing great deals with every light bulb that s turned on? Is there any way to make sure you re getting the best contract possible? This guide will help you make the right decisions. We ll look at how the deregulated market works, the meaning behind your electricity bill, misconceptions about the industry, and buying strategies that work miracles. You re a great fit for this guide if you match the following: You re in a deregulated electricity market. You re buying commercial energy. You want to make sure you re getting the best prices. READING OUR GUIDE This guide is organized into nine sections Part 1: Buying Electricity in a Deregulated Market Part 2: Advantages of Deregulation Part 3: Breaking Down Your Electricity Bill Part 4: Top Four Electricity Contracts Part 5: Seven Secrets to Success Part 6: Five Common Misconceptions Part 7: Developing an Energy Management Strategy Part 8: Using an Expert to Save Money: Three Steps Part 9: Glossary 02

3 PART 1: BUYING ELECTRICITY IN A DEREGULATED MARKET The energy market is evolving fast. Just a little over a decade ago, the market was owned by utilities and highly regulated. Today, 17 states are deregulated to some degree either electricity, natural gas, or both and that number continues to grow. This is good news because it increases competition by giving consumers more choices. Electricity Natural Gas Electricity & Natural Gas 03

4 PART 1: BUYING ELECTRICITY IN A DEREGULATED MARKET Missing Great Opportunities The fact is, deregulation has been great for Texas. Deregulation has created a lot of opportunities to save money on electricity. But unfortunately, not everyone has been able to take advantage of these opportunities. Why? As the market grew more complicated, many business consumers didn t become more educated. They lost out on thousands of dollars or more that they could have potentially saved every year! Why are buyers missing such great opportunities? Several behaviors contribute to this: Trusting prices shown by a salesman rather than doing their own research. Renewing the same plan year after year. Not understanding a contract enough to read it critically. Mistakenly believing that the same price quote from two different suppliers represent the same thing. Waiting until the last minute to find a new contract. Understanding Deregulation The first step to becoming a more knowledgeable buyer is understanding how deregulation works. In a regulated market, everyone buys electricity from the same utility. This monopoly can lead to higher rates. In a deregulated market, however, suppliers compete to offer you the best prices. Customers are able to choose a supplier based on the lowest costs and best contracts. Some people avoid making these changes because they fear that they might go without power. They ask: Can I lose electricity by switching to a different supplier? If you re wondering the same thing, let me assure you that the answer is an emphatic NO. Electricity transmission is guaranteed by the Public Utility Commission (PUC). Changing suppliers doesn t affect your service one way or the other. Don t be afraid to change suppliers. You won t lose power! 04

5 PART 1: BUYING ELECTRICITY IN A DEREGULATED MARKET How It Works In a regulated market, the local utility controls the generation and transmission of the electricity, and sells it directly to consumers. In a deregulated market, these three steps are separated. Generation Several different companies can generate electricity and even offer a variety of cleaner options, like wind, hydro and solar power. Transmission Under deregulation, the local utility still transmits electricity and oversees its delivery through poles and wires. This company handles all outages, no matter who your supplier is. Your bill includes charges paid to the utility and these charges are regulated by the Public Utility Commission. Sales Generation Transmission Sales Unlike regulated markets, electricity is no longer sold by only one utility. Instead, it is sold by numerous Retail Electric Providers (REPs). They compete for your business by offering different prices and contract terms. Typically, staying with the original utility company will result in a higher bill. What Can Affect Your Price? In a regulated market the utility picks the monthly rate under government supervision, but in a deregulated market many things can affect your final bill. The factors include: Aggregating usage with other customers to lower prices Length of contract Natural gas, oil and other price fluctuations A float in a contract The current price of electricity on the market Other factors affecting the commodities market 05

6 PART 2: ADVANTAGES OF DEREGULATION Knowledge is power. If you know how to navigate the complex deregulated energy market, then you will be able to enjoy advantages that buyers stuck in regulated areas miss. Here are just a few examples: Lower Costs By choosing a good REP, you can save at least 5 percent more on your bill than if you stayed with the original utility company. If you re a savvy shopper and purchase competitively, you may enjoy savings from 10 to 20 percent or even more. Price Risk vs. Certainty In a deregulated market, you can choose how much risk you re willing to take on. Your choices range from having a fixed rate every month for the duration of your contract to letting your rates change month to month with the market. Flexibility Flexibility is a key advantage. Do you want most of your energy to come from environmentally friendly sources? Choose a supplier with the same goals. Does your facility have unique needs, such as lowering its usage during peak times? Look for contracts that help you save based on your uniqueness. Reliability Reliability remains the same whether you re in a regulated or a deregulated market. Remember that the same company handles your energy transmission, no matter your REP. If there s an outage, you ll contact this utility, not your REP. And in a worst case scenario, if your REP goes out of business for any reason, you still won t lose electricity. You ll automatically be switched to a month-to-month contract with a provider of last resort. 06

7 PART 3: BREAKING DOWN YOUR ELECTRIC BILL Your electricity bill is actually more complicated than it appears at first glance. We ve included a generic bill below as an example. Remember, each REP s bill may look a little different, depending on what the REP calls out and what it lumps into categories. This is part of what makes buying electricity so complicated Your bill doesn t tell the whole story. If an REP offers you a lower rate than your current bill, this doesn t necessarily mean your actual bill would be lower. 1. Energy Charge: This shows your total charge based on (1) how many kilowatt-hours of electricity you used that month, multiplied by (2) the rate your REP charges. NOTE: This may have additional charges within it, depending on the REP s policy, and it varies based on whether you have a fixed, variable or mixed contract. We ll discuss this in more detail later. 2. TDU Delivery Charge: TDU stands for Transmission and Distribution Utility. This is the utility that services the wires and delivers your electricity. Fees from the TDU are sometimes alternatively called TDSP Fee. These fees are supposed to be pass-through charges from the TDU, but some REPs inflate these charges. 3. PUC Assessment: This is a fee charged by the Public Utility Regulatory Act. 4. Gross Receipts Reimbursement: This helps cover taxes that REPs must pay. 5. Sales Tax: Charged by your city, state or district. Bills can vary from month to month. Some REPs pass-through unexpected charges to their customers and others lump these charges into their original quote. Some of these unexpected charges may involve nodal zones. Texas used to calculate electricity costs based on four zones. Now, the state is divided into thousands of nodes instead, which are delivery points that help pinpoint areas of energy congestion. These can result in extra charges on your bill, depending on your plan, if you live in an area that has higher energy needs or can t handle energy congestion as well. You ll want to know if your contract passes these nodal charges on to you. 07

8 PART 4: THE 4 TYPES OF ELECTRICITY CONTRACTS The energy market is volatile. Prices can be low for a while and then skyrocket unexpectedly. Finding the right contract for your business means knowing your needs and correctly forecasting the energy market s future. Things can get complicated when you start talking to REPs. You ll need to read each quote very closely to make sure you don t pick a contract that looks good but will cost you more WARNING Watch for penalties for using too much energy, cancelling your contract early, and other hidden fees in a fixed quote. in the end. Here are examples of the major contract options that you ll encounter. An REP might offer these exact options or use sales-speak that s unique to the supplier. Fixed Price Contracts With a fixed option, you re locking in a rate for the term of your contract. The rate depends on your timing. If energy prices are low, then you ll save yourself from paying higher prices when the rate goes up. But if you time it badly and energy prices dip later, you ll lose money. A fixed-price contract is good for businesses who: Are risk-averse. Need to know their exact energy budget. Want to commit to a contract (typically one to five years). Watch out for contracts that start with extra-low introductory teaser rates that increase after a few months. 08

9 PART 4: THE 4 TYPES OF ELECTRICITY CONTRACTS Variable Price Contracts A variable-rate contract is more flexible but also more volatile. WARNING Your contract only lasts month-to-month and you can cancel Rates can increase substantially without penalty. However, the rate you pay can change at any during times of high demand, time based on commodity prices like the cost of natural gas like very hot Texas summers. and other factors that the REP chooses. REPs typically try to keep the rates low because they re competing with other suppliers, but this is not always the case. A variable-rate contract is good for businesses who: Want shorter contracts and are willing to change if rates go up. Can keep an eye on conditions that affect electricity rates. Are willing to take on the risk of higher rates for the chance that rates will be lower than fixed-price. Indexed Contracts Indexed contracts are the riskiest. Like variable contracts, these are month-to-month. With indexed contracts, however, rates are tied to a public index, like natural gas costs. This can catch an unprepared business by surprise. An indexed contract is good for businesses who: Can constantly watch public price indexes. Believe natural gas prices will go down and stay down. Can decrease their energy usage if indexes go up. Can absorb unusually high costs. WARNING In 2014, an unexpectedly cold winter raised indexed rates in the northeastern U.S. by 400 percent! With an indexed contract, you have to keep an eye on prices and be ready to change your contract ASAP. Block and Blended Contracts Fixed, variable and index contracts are the big three when it comes to buying commercial electricity, but many REPs offer combinations of these. For example, some block contracts allow you to enjoy fixed rates for specific blocks of power, switching to variable pricing if WARNING Blended contracts are even more complicated and may require an expert s help to decipher and manage. you use more than that amount. Other contracts may work more like mutual funds, allowing you to spread the risk across different percentages. These may come with hidden penalties, however, like having to pay for unused electricity if you don t reach your blocked amount. 09

10 PART 5: SEVEN SECRETS TO SUCCESS Buying commercial electricity may be complicated, but these few nuggets of wisdom will help you avoid potential minefields. Make sure you re comparing apples-to-apples. Just because one REP bids a lower per-kilowatt-hour price doesn t mean it s actually better. If something seems too good to be true, it just might be. Check unusually low quotes for ancillary charges, such as monthly meter fees and increased transportation and delivery fees. Read between the lines for hidden charges. Does a variable contract cap how much your price can increase? Does a fixed-rate contract charge you extra if you use too little electricity? Look at how the rates differ from a 12-month to a 36-month contract. This can indicate how futures market traders believe energy rates will change. Read reviews about your potential REPs on the Better Business Bureau and PowerToChoose s Industry Scorecard. If a company gets a lot of complaints for tricking clients, avoid them. WARNING A suspiciously low rate might not include passthrough charges, like unexpected power events or line loss charges that can add up over time. Ask your REPs to list all potential pass-throughs. Does the REP go the extra mile for customer service? This can be just as important as price. Be ready to jump on a good price. Do your research, but move fast when the time is right. The electricity market changes quickly. If you re unsure about REP price quotes, check with a broker. Qualified energy brokers can often negotiate even better deals. 10

11 PART 6: FIVE COMMON MISCONCEPTIONS It s easy to overinflate our ability to succeed at a task. Even if you ve procured other commodities for your business or managed energy saving steps at your company, you may not be as ready to tackle the energy market as you think. Here are some common misconceptions of people who purchase electricity without the help of an energy professional: 1. I buy other commodities. This is pretty much the same. Buying electricity is very different from other commodities. Why? Because the energy market changes day to day, even minute to minute. A fixed rate offered today versus one offered tomorrow could lead to a difference of thousands of dollars. The energy market is volatile because so many things affect prices. The cost of raw fuels, like coal or gas, can increase electricity costs. Market fears affect electricity prices much like they affect the stock market. Bad weather can impact prices. Even regional conflicts on the other side of the world can drive up prices. 2. I ve purchased energy before. I ve helped my company cut down waste. I understand the market. Follow the energy market so you can lock in a rate when the prices have dipped. Just because you have some experience in the market doesn t mean you re ready to tackle your company s energy plan. Dealing with the commodity of energy requires a different set of skills than overseeing how a company uses electricity. Even if you ve bought energy before, you may not be up-to-date on the changing market. To make the best decision, you should be immersed in the day-to-day energy market. Sometimes you can do that on your own but sometimes you ll need an expert s help. 3. I don t have to worry about my contract until a couple months before it expires. Procrastination can cost you. If you want a fixed rate and your plan is about to expire, you have no choice but to accept the current market price. This is like rolling the dice on your savings account! Planning far ahead can net you the best savings. For example, in a declining energy market, fixing a contract for the next 12 months might cost 7 /kwh. But if your plan doesn t expire for two years, you can sign up for a fixed rate plan that starts 24 months from now. Some suppliers will give you a lower rate, like 5.5 /kwh, to encourage you to do just that! 11

12 PART 6: FIVE COMMON MISCONCEPTIONS WARNING If you let a fixed contract expire, it might automatically roll over into an indexed contract. If you re not prepared for this, the mistake could cost your company thousands of dollars. 4. Making the wrong choice won t be that big of a deal. Some people don t put in the extra time to study energy contracts because they believe the money saved is minimal. But this is very wrong. For example, some businesses have accidentally signed onto a variable plan, enticed by a low introductory rate, without studying the market or understanding if they could absorb the risk. Imagine their surprise when they were hit by an extra hot summer, expensive peak power plants had to kick in, and their bills increased by 400 percent! This may seem like a long shot, but is that a risk you re willing to take? 5. I want to stay loyal to my supplier. Your company s current REP is in the energy business and understands that clients switch REPs regularly. It s a natural part of being in a deregulated environment. Don t stick with your REP out of a sense of loyalty or a misplaced idea that he ll automatically work to get you the best rate. Do your research. If you want to be loyal, give your REP a chance to beat the best plan you find. 12

13 PART 7: DEVELOPING AN ENERGY MANAGEMENT STRATEGY In order to pick the best electricity option for your company, you don t just need a contract you need a strategy. Between today and 2018, energy markets are expected to dip and then rise again. This means that if you only plan for the short-term and don t lock in lower rates, you ll pay for that decision in the long-term. A good energy management strategy takes into account your business s unique needs and how they interact with the energy market. Here are four questions you should ask to formulate an energy strategy: 1. Are you risk averse or can your company absorb unexpected increases in your energy expenditure? 2. Do you value price and budget certainty over flexibility and fast change? 3. Are you willing to look at a multi-year contract in order to lock in a lower rate? 4. What is the long-term outlook for the energy market? Is this a good time to lock in a fixed rate? If you answered yes to the first three, then the key to your energy management strategy is being able to answer the last one. The concept of hedging your position to limit the risk of spiking elecric power prices is the key to an effective energy management strategy. Hedging Your Kilowatts So how can you be assured that locking in a rate will end up saving you money? You can t. But if you do not hedge your bets by locking in a longer term, you are basically betting that future pricing will be lower. Waiting until just before the end of your contract could be too late. In October 2013, Company X entered into a contract for 2014 and Company X plans to sign another contract in the fall of Current Contract A contract solves a short-term problem. An Energy Management Strategy plans for the long-term During 2014 and 2015, power prices for 2016 and beyond are moving upward. Anytime during 2014 & 2015 Company X could sign a contract for 2016 and beyond. By waiting until the fall of 2015 to buy for 2016, Company X is betting that prices will be lower than their current rate. Given the volatility of the current market, savvy buyers need to review their contracts 1-2 years prior to the contract end date and look to either extend their term with the current REP, or get competitive bids for a new contract of 3-5 years in length. If you do not have the time to study the market, consider calling on the expertise of a qualified energy broker to provide you market intelligence and negotiate on your behalf. 13

14 PART 8: USING AN ENERGY EXPERT TO SAVE MONEY: 3 STEPS After reading this guide, you should have a pretty good idea of whether you have the expertise to find the right REP. Picking a new contract can be risky! If you oversee the decisions for your company, you might not have the time to do all the research necessary to make an informed decision. We can each only wear so many hats! If you decide that you want a broker s expert help and leverage to get lower rates, these three steps are all you need to get the ball rolling. 1. Send copies of your utility bills to your electricity broker. Most brokers will let you fax or your bills to them. This step lets the broker see your company s usage history and determine what type of contract is best. You may also need to sign a Letter of Authorization (LOA) that allows the broker to pull all your usage history. 2. Review price quotes that your broker sends to you. Your broker will do the heavy lifting for you. He ll talk to his REP contacts, negotiate rates and get bids based on your history. These may include both fixed and variable options. Talk to your broker about whether you prefer the safety net of a fixed fee. He can advise you on which options work best with your company s style. 3. Pick the bid that best fits your needs. Once you ve determined which bid fits your company s needs the best, let your broker know. He ll send you a supplier agreement. Read all the details closely before signing. 14

15 PART 9: GLOSSARY Ancillary Charges Extra charges that can be added onto an REP s electricity quote as hidden fees. These aren t always listed in a quote and may include monthly meter fees, transportation and delivery of electricity fees. Commercial Customer A customer buying electricity for a business rather than a residence. Examples include retail stores, restaurants, churches and educational institutions. Cramming Adding charges without a customer's approval. This is illegal. Early Termination Fee A fee charged if a customer ends his contract early without an allowed reason, such as moving out of the region. Example: Ending a contract simply to switch REPs. Electric Cooperative (Co-op) A customer-owned utility that distributes electricity to its members. Electricity Facts Label (EFL) A fact sheet with standardized information about an electric plan. This can include price, fees, renewable energy and other terms. The PUC requires EFLs to help with apples to apples comparisons. Electric Reliability Council of Texas (ERCOT) Administers the Texas electrical power grid. When you switch REPs, ERCOT mails you confirmation. Fixed-Rate Plan A plan whose rate per kwh doesn t change during your contract. Only minor exceptions exist, such as changes to TDU transmissions and distribution fees or changes to laws beyond the REP s control. Generation The production of electricity. This can involve a variety of methods, such as coal, natural gas, nuclear, wind, water, biomass, and solar energy. Natural gas is the most common in Texas. Kilowatt-Hour (kwh) A unit of energy equivalent to one kilowatt (kw) of power expended for one hour of time. The electricity you use is expressed in kilowatt-hours on your bill. Peak Demand The highest 15- or 30-minute demand during a 12-month period. Provider of Last Resort If an REP leaves the market, this is the emergency default provider. A customer can leave the POLR at any time and switch to a different REP. Public Utility Commission of Texas (PUC) The state agency responsible for the regulation and oversight of electric and local telecommunication in Texas. Retail Electric Provider (REP) Also called suppliers or electric companies, the REPs sell electricity and create contracts, such as fixed or variable. They don t generate electricity or maintain wires. They must be certified by the PUC. Slamming Switching electric service without a customer's approval. This is illegal. Terms of Service (TOS) All the legalese and details of a contract between an REP and a customer. It covers the term length, fees, and other information. Transmission and Distribution The delivery of electricity over poles and wires. The PUC regulates this to ensure safety and reliability. Transmission and Distribution Utility (TDU) Also called a local wires company or a utility, the TDU delivers electricity, manages wires, and handles outages. You ll have the same TDU regardless of your REP. Usage The amount of electricity you use during a billing cycle, measured in kilowatt-hours. Variable Rate Plans The rate you pay can vary from month to month, but you have no cancellation fees. Your rate will change based on the market and your REP. These plans can take advantage of lower prices, but face greater risk if prices spike. 15

16 Providing True Apples-to-Apples Energy Quotes Since 2002, as one of the industry s most respected brokers, Texzon Utilities has helped companies navigate through the challenges of purchasing electricity in deregulated markets. With its expertise and leverage, Texzon: Secures competitive bids from multiple providers and deciphers confusing charges and hidden fees to find the true lowest electricity rates. Ancillary Fees are not always listed in the quote and could include monthly meter fees, transportation and delivery of electricity fees. Texzon s quotes never have hidden charges. Leverages volume purchasing to negotiate on the customer s behalf, causing a bidding war for the customer s energy contract. Capitalizes on windows of opportunity that exist in the energy markets, helping businesses hedge their position to limit risk and save money. Helps businesses attain price and budget certainty with strategies that address both short and long-term energy costs. Educates and informs customers of trends and opportunities in the energy markets, always looking for ways to save money and mitigate risk. Texzon helps companies of all sizes make well informed, strategic decisions regarding their energy purchases, producing savings that track to the bottom line. Get a Free Rate Quote and a Starbucks Gift Card! Click here to get your free quote, or go to texzon.org/houstonnw 16