Businesses Should Review Terms of Energy Supply Contracts

Now is the time to determine if your business is vulnerable to price swings for electricity and natural gas supply due to the volatility of the wholesale market. With cold winter months ahead, money-saving options may be available that enable you to avoid the skyrocketing energy costs that many businesses across the Northeast experienced last year when their energy expenses tripled and quadrupled over prior levels. If your energy supply price fluctuates with the wholesale market, you may be able to make changes to your contract that will save you money and make your energy costs more predictable.

The competitive retail market offers businesses a variety of different types of contracts and pricing options. To select a plan that is well-suited to your business and protects you from unpredictable costs and soaring prices, it is helpful to understand how prices are set by your energy supplier.

If your business purchases energy from competitive suppliers under a variable price contract (where the price can vary monthly) or pays real-time supply prices to the local electric or natural gas utility, you are subject to the volatility of the wholesale market. During the frigid temperatures brought on by the Polar Vortex last year, energy consumption rose to new levels, demand was not sufficient to meet the supply and wholesale energy prices spiked. In many instances, these wholesale price spikes were passed along to businesses such as financial institutions and health care facilities.

Businesses wishing to avoid this price volatility may opt for a fixed price contract, which will often start at a higher price per kWh than a variable price contract. However, rather than fluctuating monthly, a fixed price contract will afford energy cost stability over a longer period of time, such as two to three years and may save money over time.

Assume a business consumes 2.5 million kWh per month and enters into a three-year fixed price contract with a competitive supplier at 7.5 cents per kWh. Its costs would be $187,500 every month for three years, and it would not be affected by price spikes in the wholesale market. If that same business had instead entered into a month-to-month contract with a competitive supplier for a lower variable price of 6.0 cents per kWh, its bill would have been $150,000. While that would have resulted in lower bills in some months, a variable price contract subjects the business to market-driven increases without advance notice. In fact, some competitive suppliers charged businesses 18 to 40 cents per kWh when wholesale market prices spiked during the Polar Vortex last year. At the price of 18 cents per kWh, the business’ monthly bill would have been $450,000, quickly obliterating any savings realized during the low-cost months.

This example illustrates the importance of knowing the terms and conditions of your business’ energy contract and monitoring your bills to identify any price spikes warranting a change in the competitive supplier who provides your electricity or natural gas. In many states where electric and natural gas industries have been deregulated, businesses are finding that they are on their own to protect their interests. In Pennsylvania, for instance, the Pennsylvania Public Utility Commission (PaPUC) recently ruled that it does not regulate prices charged by competitive suppliers or interpret contracts between competitive suppliers and their customers. See Commonwealth, et al. v. Blue Pilot Energy, LLC, Docket No. C-2014-2427655 (Order entered December 11, 2014); Office of Small Business Advocate v. FirstEnergy Solutions Corp., Docket No. P-2014-2421556 (Motion adopted November 13, 2014).

Taking a few minutes to review your energy contract can save you money or make your costs more predictable. Another way to minimize the effects of wholesale price swings is to reduce energy consumption. This can be accomplished through upgrades to energy-efficient equipment, for which funding and financing are often available or by shifting usage to times when energy is not as costly.