When Is The Best Time Of Year To Lock In Your Long-Term Electricity Contract?

as shown in the chart below, there’s historical proof  that long-term, fixed-price electricity contract rates tend to go down during the fall and spring season each year as natural gas prices move toward  their seasonal  lows.  Today, with natural gas prices at low levels, more and more energy suppliers are using natural gas as the primary source to generate electricity. The increasing percentage of natural gas in electricity generation production has caused commercial electricity rates and natural gas prices to be highly correlated; A rise in natural gas prices is sure to be followed by a rise in forward electricity rates. This means that when you look to lock in long term fixed electricity, the forward natural gas price will have the greatest  effect on the final price for power.  Since electricity pricing is based on future forward contracts fixed rates are highly correlated with natural gas future contracts.

 So how exactly does gas set the power price? In most regions of the US, the price paid for electricity from the last power plant fired up (to meet the last unit of demand within a given hour) sets the wholesale price paid to all previously dispatched units within that region. And since gas-fired power plants are usually the quickest to start (and most expensive to run) when compared to nuclear, hydro, wind and coal they tend to be fired up last, thereby setting the hourly price. 

 With natural gas prices at or near seasonal  highs, buyers who rely solely on the bias of a sales person more interested in timing the close of the sale (and his commission), instead of timing the market  will usually end up making a  poor buying decision that can  affect the company budget for years. 

Market conditions like seasonal highs and lows play a major role  in determining how varying contract term lengths are priced.  

  The graph below reflects the seasonal pattern of  natural gas since the start of trading over 22 years ago. The addition of a most recent 15 year period (solid line) helps to show how the seasonal pattern has evolved over time.  The graph reaching  0 represents the seasonal low (the time of year when prices are most consistently low) and the graph at 100 represents the seasonal high.  A reading of 20 represents when prices have tended to be in the lower 20% of the year's eventual  price range.

 So then, how can you take advantage of the seasonal lows in electricity prices when your contracts don’t expire at the right time? It’s really a lot easier than you think.

  First, ask for your next contract to have a  “customized ” term (of any length) that would put all  future renewal dates at or near the spring or fall season.  Most retail electricity providers can quote customized term lengths outside the normal 12, 24, 36 & 48 months commonly used.  Once your renewal dates are  in sync with the gas market,  then all  future quotes can then be requested in standardized terms lengths.

 Second, even  if you’re not able to time the renewal dates as described above, you should always  look to price and lock-in all your energy contacts during the annual lows (regardless of expiration dates) as all months in the forward curve will generally be lower during this same period.  

Third and most important, ask yourself why your current broker or consultant hasn’t suggested this strategy in the past?  Could it be their knowledge or experience level?  Sure, there are a lot of brokers out there. Some of them are talented, hard-working, honest business people, and some just don’t have the industry experience and know-how as those of us directly in the business.   With over 22 years experience in electricity, very few are as tested and successful as we are.  We know the commercial electricity market, and we know how to help our clients develop and execute an energy strategy that can save money and reduce risk.