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Risky Business: Some Retail Energy Providers Left in the Cold After Recent Price Spike

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Last week’s extreme cold directly impacted energy prices for many energy consumers. But many consumers have fixed-price contracts and were not exposed to the latest market volatility.

One would think that these fixed-price customers should be safe from higher prices - but are they? Unfortunately, no. Some Retail Energy Providers (REP’s) are very vulnerable to energy prices spikes due to their weak credit status, among other things.

Higher prices may necessitate increased collateral payments tied to hedges from wholesale suppliers. And cold weather increases customer demand, so a REP may need to acquire incremental supply at a higher market price. Even worse, if a REP was not properly hedged or was speculating in the market, they might be fully exposed to price spikes and could incur large financial losses.

Every few years there are severe market price spikes and numerous REPs are driven out of business. Unfortunately, their customers may be left with a broken retail contract that is usually significantly below current prices available with little recourse.

We have seen some initial impacts in New England as two REPs were having trouble meeting obligations during December. After much more extreme market conditions last week, it would not be a surprise to see more widespread ramifications in the near future.

What is the solution? Staying with the utility is not it. Utilities are generally financially sound, but most do not offer the cost savings and strategic benefits available with a third-party supplier. More importantly, be sure to vet your REP. Financially strong suppliers have the resources to withstand market volatility and generally do not rely on risky strategies as part of their business. Our previous blog article provides tips about what to look for in a financially strong energy supplier.

Retail energy competition offers many positive alternatives for consumers including supplier options, innovative products, and budget-friendly prices, and it is not be as simple as choosing the supplier with the lowest price. By doing a little homework, you should be able to find a competitive and fair price with the reliability that you should expect from your energy supplier.

Posted: January 15, 2014

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