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Not all Fixed Rate Energy Solutions are Created Equal

By Direct Energy Business

Buying energy can be rough in Alberta.

Businesses in Alberta seeking predictability and savings on their energy spending may turn to a fixed price procurement solution. The “set-it-and-forget-it” approach to locking in a rate is an enticing option for managers coping in the province’s uncertain energy market.

Fixed rate strategies seem simple on the outside: Energy consumers in deregulated markets compare rates between retail suppliers, select a rate that best suits their budget and pay that rate per kilowatt hour for the length of the contract.

However, fixed rate solutions can have drastically different results depending on how the supplier calculates the fixed rate. The rate often only remains fixed if you stay within your estimated usage range, and usage that exceeds the estimated target is often billed at the current market rate. Overage calculations are typically buried in the contract fine print, offloading risk to the customer at the worst possible time. To have certainty over your electricity bill, it’s imperative to pay special attention to how your supplier calculates this variance over the length of the contract.

This is especially crucial in Alberta, where weather extremes, market turbulence and extremely high prices are common. Buying energy under a fixed rate structure without considering potential overages is “a common practice in Alberta that leaves customers with far less price certainty than they think,” according to John Mullrooney, Manager of Canadian Power Optimization at Direct Energy Business.

When a fixed rate goes wrong

During the energy buying process, budget-minded customers may think selecting the retailer with the lowest rate is an easy way to save money on their energy bill. But Mullrooney advises business consumers that the lowest rate may not result in the lowest cost.

“This strategy can actually cost more in the long run if you are subject to even a single overage charge,” Mullrooney says.

Under a fixed rate, price premiums are calculated based on the customer’s historical and estimated usage, and the rate will stay the same as long you are within the estimated usage target. If your actual energy usage exceeds that target threshold, you’ll likely be charged for the overage at the current market rate. This difference in expected energy usage verses actual energy usage is called “variance.”

How does Alberta’s weather affect energy spending?

Variance calculations are especially important to consider in a dual-peaking energy market like Alberta. In the summer, the grid is strained by air conditioners, while heating demand causes a similar problem in the winter. With extreme temperatures in both seasons, the energy market may spike unpredictably more than once per year, or even more than once per season.

Overage charges are a particular concern for Alberta businesses whose energy costs originate primarily from heating and cooling, such as those in retail, commercial and residential sectors. These sectors have demand profiles that are shaped by weather conditions, such as temperature highs and lows.

Extreme weather both requires consumers to use more energy for heating or cooling, and simultaneously causes higher market prices. This unavoidable combination causes regular monthly overages, charged at a high rate. What looks like an insignificant variance in usage could be devastating to an Alberta business’s energy spending when they’re charged at a high market price. 

Fortunately, you can avoid overages, and their potentially expensive consequences, by choosing a fixed rate with variance calculated annually.

Why choose an annual variance?

Variance can be calculated either monthly or annually.

With monthly variance calculations, a customer is allotted a certain number of kilowatts at a fixed rate during a single month. Their usage target is set based mainly on historical data and may differ each month according to expected seasonal needs. These plans usually allow 10 percent variance each month without price consequences – meaning that monthly usage must exceed 10 percent of the contracted expected usage before market rates kick in.

With annual variance calculations, a customer is allotted a certain number of kilowatts at a fixed rate to use across the entire year. This structure offers a generous margin for unpredictable and seasonal usage spikes, which can be offset throughout the year. Additionally fixed rates with annual variance usually allow for 25 percent variance from the estimated annual usage each year – a much more feasible goal for energy consumers to achieve. While fixed rates with annual variance may cost slightly more per kilowatt, the higher tolerance for overages distributed over the entire year gives you superior protection against the unexpected – and costly – spikes in usage.

“Under an annual variance, any seasonal rate spikes will get averaged out over time, and that helps balance weather incidents,” says Mullrooney. “We have very few customers who fall outside of that 25 percent range.”

Alberta’s weather extremes make replicating results from historical data near impossible on a month-by-month basis, and a 10 percent variance doesn’t offer much price protection.

Consider the example shown in the chart below. The green line shows Alberta power prices in early 2019. The vertical bars show Alberta temperatures measured in Celsius. As you can see, a cold front in early February caused a major energy price spike from approximately $60 per megawatt up to a shocking $500 per megawatt – more than eight times higher.

 

Unless they shut off operations, Alberta businesses on monthly variance in February 2019 would have almost certainly exceeded their estimated monthly usage by a significant margin – likely greater than 10 percent. Consequently, these businesses would have been billed at the prevailing market price and incurred significant overage changes.

Conversely, businesses with an annual 25 percent variance will enjoy the remainder of their annual contract to offset the spike in demand, without obligation to purchase extra power at the current high market rate. The slightly higher cost of a 25 percent annual tolerance versus 10 percent monthly contract acts as insurance against these types of market conditions.

Don’t put your energy budget at risk

For Alberta businesses, a monthly variance plan is a risky proposition. Consumers with volatile electricity loads, like industrials and retailers, are especially likely to breach monthly tolerance levels. And when that occurs, their pricing is structured to protect the energy supplier, passing off risk to the business. Perhaps worse, those implications are usually buried in the fine print where customers won’t see or understand them.

Direct Energy Business is looking out for Alberta businesses by keeping fixed price targets based on annual variance. Our business customers can consume power at a fixed price at any time during the year with guaranteed pricing within 25 percent of the expected usage.

Choose a fixed rate with annual variance, a solution that can reduce your overall energy costs and insulate your business from rate spikes during even the most extreme weather events.

Learn more about what's changing in the Alberta electricity market
Posted: April 16, 2019

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