September 25, 2008
With energy prices soaring, is this the right time to lock into a fixed-rate gas contract or should you stick with the floating rate offered by your utility?
Both electricity and natural gas prices will surge as North American utilities shift from coal-fired generation to cleaner burning natural gas generation, suggests a recent report from CIBC World Markets.
Natural gas prices are tied to oil prices, which are predicted to stay strong, and that means utilities seeking gas to fuel generating facilities will face higher costs, passing those costs along to customers wherever possible. On the other hand, wholesale natural gas prices have tumbled sharply since mid-summer.
Oh, and another thing. Natural gas in Canada is priced in U.S. dollars, so if the Canadian dollar goes down, gas prices will go up simply because of the currency.
So, does this mean you should sign that fixed-price contract the next time someone starts banging on your front door? Well, it’s either that or continuing with your utility’s variable rate, which changes every three months and may have retroactive charges.
Essentially, when you sign up for a fixed-price contract, you’re placing a bet that future prices of natural gas will rise faster than expected and stay there. Even if they do, the increase must be more than the marketer’s mark-up for you to come out ahead of those paying floating rates.
Fixed-price contract retailers are middlemen, operating much like the banks. A bank offers its fixed-rate mortgage loans with money borrowed from customers who bought GICs with matching terms, making a profit on the spread between the interest rate it charges and what it has to pay out on deposits.
Natural gas retailers operate in a similar fashion except that they enjoy better margins than most banks. In fact, critics like Energy Probe put those mark-ups as high as 15%, which means that natural gas prices really have to take off for you to be ahead over the long term. There are clear pricing differences among retailers, however.
Energyshop.com is a good place to review current prices and options. It has a price comparison feature on its web site that allows buyers to shop around for the best deal from the marketers, ranging from one to five year contracts.
According to Energyshop’s research, which goes back to July 1999, Ontario consumers who locked in prices in the past have realized a savings about two thirds of the time. More recently, however, those who signed or renewed energy contracts have paid more than if they had stayed with their local utility.
The current price for natural gas ranges from 37.5 cents to 43.9 cents a cubic metre for a five-year deal, according to Energyshop. This means, at today’s rates, the utilities are charging less than what you can expect to pay from the retailers. But that can clearly change as regulators review and set price levels in October.
When approached by an agent, it’s important to distinguish between someone who says he selling you savings — which he can’t guarantee since no one can say for sure what prices are going to do — and certainty — which, if you’re a worrier, might help take your mind off the impact of energy prices on your budget.
If you do buy at the door, remember that you need to reaffirm the contract by phone for it to be valid. Be sure you know the price offered, any exit fees if you want out in the future, and your renewal options. If you don’t like what you see or it doesn’t jibe with the sales pitch, cancel — but don’t take too long.
You only have 10 calendar days from the date you signed to back out. If you’ve signed up at the doorstep or over the Internet, this 10-day period starts when you make the commitment to the retailer. Although every case is unique, marketers are generally reluctant to let people change their mind once this window closes.
If you do change your mind, be sure to deliver the cancellation notice in a way that will allow you to prove you sent it in case of a dispute.
A fixed-price contract might work for you if …
- You’re looking for stable energy prices over the term of the contract.
- You want to be protected against short-term price spikes resulting from natural events such as hurricanes and earthquakes.
- A retailer can offer further incentives to earn your business.
But a fixed-price contract might turn out to be a bad idea if …
- You can live with the uncertainty of floating prices.
- You end up trapped at the contract price for the full term and rates subsequently drop.
- You get stuck with early exit fees when you have to cancel before the end of the term.
Although it doesn’t change the actual pricing, one way to ride out a period of higher energy bills is by signing up for a billing plan that spreads your costs evenly through the year. This way, you can work the base number into your budget and still benefit from any market corrections along the way. But if you lock in today’s natural gas prices for the next few years, you’re stuck with them.