If you live in an area that has an open market for electricity providers, then you may find shopping for a provider to be overwhelming. Between rate choices, term choices, and the variety of fees companies charge, finding the perfect provider can be complicated. Understanding the basic steps to take when planning to enter an energy contract can help you make sense of the process.
Following these eight steps will help guide you in researching your choices and deciding on the best contract terms and provider for your needs.
Research Local Price Fluctuations
Understanding price fluctuations in your area is important when planning the best time to sign a new electrical contract. If you live in a southern part of the country, the prices most likely spike in the summer, and for those living in the northern part of the country, the prices will be highest in the winter. The general rule is that when demand for energy increases, the prices increase.
Providers change their rates based on the price they have to pay for electricity. When more energy is being used, cities often have to fire up more expensive power plants to meet the demand, which increases the price of electricity for providers, and, in turn, for consumers.
Unless your city has experienced strange weather, a natural disaster, or a major population change, most cities have a predictable pattern of rate fluctuations. Find city-specific historical rates on your city government’s website or call them if you can’t find the data. When all else fails, you can use historical data from the EIA to find out what months electricity costs are at their lowest in your state because you city’s rate patterns probably match the state’s.
Understand Your Energy Needs
If you don’t understand your current electrical needs, you won’t be able to assess what your future needs will be. Look at the past year or two in electrical bills to find patterns. Pay particular attention to your kWh usage. Most companies offer tiered plans based on how many kWh are used per month. Household rates usually range from 500 to 2,000 kWh plans, while businesses start at about 5,000 kWh and run in access of 50,000 kWh. You need to understand into which tier you fall.
Most companies offer savings for higher kWh rates, but those higher tiers often come with higher additional fees. Many companies also charge for under or over usage based on your tier, so pinpointing your exact tier is important to maximize your savings.
Understand Your Current Contract
Electrical contracts can be confusing, but unless you have a thorough understanding of the terms of your current contract, you won’t know what to look for when trying to improve your those terms. Check your current kWh rate, whether the rate is fixed or variable, your contract expiration date, and what add-on costs you are paying. All contracts have to detail extra costs, but sometimes you have to dig deep into the contract language to find it.
When planning to change providers, you should try to reach out at least a month before your contract expires so the transition will be smooth.
Research Available Providers
When looking for providers in your area, you should consult state-run sites for the full list of suppliers with licenses to work in that state. Price comparison sites, while convenient, may only list providers they represent, so it’s best to get your full list of options from a government source. Some state sites even post reviews of the companies listed, which can help you streamline your research.
If you do use a price comparison site to conduct your initial research, you should pick your top contenders and check the company’s sites for rates as they may be cheaper than what’s shown on the comparison site.
You should also look up each company on the Better Business Bureau site and other review sites. Keep in mind that most customers only write reviews if they are very happy or mad, so look at the reviews on the whole. What is the ratio between good and bad reviews and what themes keep emerging? No company is going to have perfect reviews, so it’s best to go into a relationship with a new company understanding what the pros and cons are going to be.
Choose a Rate
Most plans fall into two rate types—variable (index) or a fixed market rate. For most customers, a fixed rate is ideal because it’s easier to budget for, but in some cases, variable rates make more sense.
Variable rates (or index rates) can fluctuate wildly from one month to the next depending on what price your provider has to pay for electricity at any given moment. Because energy prices have been declining over the past years, the variable rate may be a viable choice, especially if you are located in an area that doesn’t experience extreme weather changes that dramatically affect the demand on power plants.
Variable rates are often best for companies that can monitor market prices and schedule their high-energy processes for off-peak hours when electricity prices are lower. They’re also often used as a stop-gap measure until prices are optimal to switch to a fixed-rate plan because variable rate plans are usually available on a month-to-month basis.
Fixed rate plans are a popular option for customers because the regular monthly billing price allows them to budget for their electrical needs more easily. Fixed rate plans are often best for smaller companies and start-ups that need stability in their budgets. Be careful that you don’t set up your fixed rate plan during a month with a high rate, or you’ll be overpaying for electricity during the less expensive months.
You also have the option of a combination plan, which locks in a certain percentage of your usage at a fixed rate and anything above that kWh usage tier will be charged at the index market rate. This plan is usually only available to larger companies or to co-ops of smaller companies who pool their plans.
Choose a Term
There are a variety of terms to choose from, from month-to-month, three-month, 12-month and even five-year contracts. Any term-limit you choose is a bit of a gamble. If you set up a fixed-rate contract in a month where the rates are low, you may wish to sign a contract that lasts a year or more. But there’s always the risk of “missing out.”
For instance, if you sign a two-year contract and electricity rates decrease the next year, then you miss out on that rate decrease. Conversely, you may sign a one-year contract on the assumption that rates will be lower next year, but they may actually be higher. Then you are paying a higher rate then you would have if you signed a longer-term contract. Choose your gamble wisely.
It’s also important to understand what your cancellation fees or are. Most variable rate contracts do not carry cancellation fees, but most long-term contracts have cancellation fees that are high enough to negate any savings you may make from switching to a different contract if you find a better rate. Luckily, if you need to move, there are laws that protect customers from having to pay cancellation fees, and if you move to a new location in the city, you can easily transfer your plan to your new address.
Choosing a term length can be nerve-wracking, which is why it’s important to pay attention to average rate changes in your city and the electricity market trends and outlooks. This is where a third-party broker can help you understand the risks and rewards for each rate-type and term length.
Understand Hidden Fees
For any plan, you must understand the “hidden” fees. Many contracts require you to use a certain amount of electricity or face extra charges. Also, overhead costs related to the nation’s aging energy infrastructure means that lower electricity rates don’t lower your bill as much as they used to. Today, 50% of your bill may be comprised of these mandatory fees. Always factor these fees into your decision on which plan is best for your budget.
Each electricity provider displays their utility charges and other fees in the Electricity Facts Label (EFL) or contract language that you can read before choosing a provider. Understand what each company charges you for in addition to your usage fees because these fees are why many customers are hit with higher bills than they are expecting.
Some companies bundle the additional costs in their estimated electricity rates, while others hide the costs in their contract language. If you see a company that charges a higher rate for electricity than another, it may be because they have included additional fees in the price, so don’t reject the company out of hand until you understand what their prices entail.
You should also beware of promotional pricing. If one company’s electricity price is significantly lower than other companies, it may be a short-term (sometimes as short as one month) discount on the price of electricity.
Fees may include:
Base Charge. The minimum amount of energy you have to pay every month (even if you use no energy that month.)
TDU Delivery Charge. The cost of delivering energy to your home. Some companies have very high TDU charges, so this is a very important extra charge to find before you enter into a contract.
Non-recurring Charges. These are one-time charges you might incur if you call for customer service help, request documents from your company, cancel your contract, receive a disconnection notice, or pay your bill late. There may also be a minimum usage fee if you don’t use enough energy that month.
Advanced Meter Fee. Some states allow companies to charge an extra fee for using an advanced meter.
Add/Delete Fees. At larger businesses, you may have more than one location. Find out what the fees are to add or delete locations from your plan.
Other Taxes and Fees. Depending on your state you may face additional taxes and fees like gross receipts tax reimbursements or PUC assessment fees. If you see additional fees in the EFL or contract terms, do some research to understand them.
Many customers don’t know that they can negotiate their electricity contracts with the electricity providers. As with any free-market system, companies are competing with each other for your business and have wiggle room on their standard contracts to convince you to use their business.
Energy providers prefer to have customers with stable energy usage, which, in turn, allows them to plan for future energy needs. This motivates providers to work with customers in assessing their electricity usage and finding the best plan for their needs. When approaching companies for negotiation, you should have information on your facilities’ energy usage over the past year to estimate future needs appropriately.
When negotiating, look for flexible plans that allow you a certain percentage above or below your chosen kWh rate without incurring extra charges for unexpected changes in usage. This flexibility is really useful for larger businesses that may need to add or remove locations from their plan. Many providers offer free add/delete options up to a certain percentage of usage, but you must negotiate those terms with your provider.
If you intend to negotiate, you must do so well in advance of your current contract expires. If you are working under a time-crunch, you will not have the flexibility you need to get the most ideal terms available.
To get the best prices possible for your electricity use, you need to put in the work. Understand your current contracts and energy usage, energy market trends, and the different fees providers charge. It will all be worth it when you get your bill and see how much money you’re saving on a yearly basis.