Stand Clear, Stand Clear?- Setting Your Electricity Contracts
Sound familiar? You are looking at the electricity market and it's a roller coaster ride. You watch the ride from the sidelines as the roller coaster goes through its paces. People are riding the roller coaster hitting the lows and loving it for they knew what to expect. Those who get off feeling ill didn't asses the negatives that were in front of them before going on the ride.
You move an inch closer to the platform your interest is now peaked as you have seen friends and colleagues get off at the other end and can't wait to get back on. You hear over the intercom "Stand Clear, Stand Clear the ride is approaching the station stand back behind the yellow line until advised by the attendant". If you are smart you will wait until advised before jumping on otherwise it could end up messy. You watch as the ride makes its entry. You jump on board, the ride is about to start and you hear the electricity ride operator say "HOLD ON" as he pulls down your safety harness. If the safety belt is on correctly and you have assessed that you are fit for this ride you know you won't have a problem, you will begin this ride with a well planned and correctly priced electricity contract and enjoying it just like your colleagues.
The Electricity market is like a roller coaster, it has its ups and downs. These are daily and weekly occurrences and the market can change rapidly. Why is the market so volatile you may be thinking? The simple answer is UNCERTAINTY. There are many factors that play into uncertainty, such as what is happening with Carbon taxes?, Peak Demand issues, Winter heating and Summer cooling, Heat waves, ongoing drought, Generation and distribution failure due to ageing equipment. These can all cause the market electricity price to shift at any time.
What is the answer to overcoming uncertainty? The 5 P's (Prior Preparation Prevents Poor Performance). Try to understand the market your are entering into or ASK someone who knows what they are doing. There are some great opportunities at present to save on your electricity costs and re-set your contracts if you do your homework.
If your are already in contract and on the ride, remember PPPPP. Just because you are on contract and locked in you need to be preparing for your renewal contract. IF the market is good, as it is now, you need to set your contracts or renew them 12 months to 2 years out from the current expiry date. YES that's correct, you can forward date contracts and place them on top of each other. In doing so in a good market you can lock in some extremely good electricity prices and plan these costs into the future. If the market is bad you have the option to wait.
Think of it this way, you are now forecasting, it is like locking your Mortgage into a fixed rate when you know the market is going to go up, and most likely not going to come down again. However, forecasting the value of your electricity contract you still have to factor in some variables like increases in the network and distribution charges. Meaning you can fix your retail price (which is generally 50% of your bill) and lock it in with no CPI increases, yet make sure you calculate the estimated increases in distribution and network charges if you want to get accurate forecasting of this cost, for your cash flows or sinking funds.
What will the market be like in 3-5 years? Well based on current increases in the QLD market alone, there is an expected government gazette tariff increase due on 1st July for a 13.6% increase that is known. With the uncertainty about the price of Carbon Taxes to energy production costs it looks like there will be further steep increases into the future. You can stay on the side line and watch everyone else ride or you can make informed decisions.
A simple example, so you can see what benefit there is by looking at a market contract. If you are on tariff at this time in the market cycle: a building that had common area power of 312 MWh per annum electing to take out a market contract with current increases in tariff taking effect in July this year, would likely be saving in excess of $85,000 + over a 45 month contract. NOT bad for an informed decision.
Tips for those going on the ride or back near the station :
- Tip 1 : PPPPP, make sure you do your homework and set your contracts when the market is in its low.
- Tip 2 : 12 - 16 months from end of your existing contracts expiry date is a good time to start reviewing, If the market is LOW then GO, don't wait for things to get slightly better if they are good now. If you run out of time on your contract, you may be forced to take what the market is offering at the time. If you set when you think it is good don't punish yourself if it the market slightly gets better, remember there is always that chance it could get allot worse.
- Tip 3 : A general rule of thumb try NOT to (re)negotiate contracts during peak consumption times, like the middle of summer or winter.
- Tip 4 : When your contract is due for renewal DO NOT take the first offer presented by your current supplier. Seek advice from a professional in the industry such as an energy auditor. Furthermore, if you fail to reject the offer in writing once notified of a renewal price from the existing energy retailer, under some contracts retailers may roll over the contract at the new price offered, which may be a great deal higher than that of a competitor.
- Tip 5 : It is important to not allow your existing contract to expire as you will go onto the spot market for electricity. This could prove to be a very costly business decision as the variables in market could have you paying as significantly more for energy . Energy contracts have validity dates like any contract, So if you let this lapse and don't re-sign a contract with a retailer, then your current retailer is obliged under the National Electricity Rules to continue to supply you with electricity so long as you pay your bill, the new price however that is charged will now be the default price including an additional administration charge. These default prices are worked out from the spot market price, and you could pay more than triple your previously contracted rate on electricity.
- Tip 6 : Engage a consultant who knows what to analyze and look for. Buying or re-negotiating at the right time could be the difference between Tens of Thousands of dollars over the life of a contract. Quotes and contracts can be forward-dated.
- Tip 7 : Try and reduce your peak demand of electricity and your consumption by becoming energy efficient. This will not only reduce your bottom line it will reduce your carbon footprint.
Energy efficiency and demand side management will be our next article to look forward to. We will go through the benefits, the perceptions and the barriers on making your business or building energy efficient.
Regards the Watt Utilities Team