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Lock in electric rates or continue month-to-month?
Old 07-08-2008, 10:10 PM   #1
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Lock in electric rates or continue month-to-month?

Here's my second thread on outrageous electricity prices. Until now we've been on the month-to-month plan and were paying about $0.12/kWh. However, in the last three months, that has shot up to $0.187/kWh. This is primarily driven by an increase in the cost of natural gas, which is how most power in Texas is generated.

My question is, I can lock in a rate of $0.15/kWh for the next 12 months. However, if rates go down, I would have to pay $100 to break the contract. I have no way to predict natural gas prices but I wonder if they have peaked and will be coming back to earth shortly (see graph). On the other hand, they could easily continue to go up. Is it worth limiting my risk by locking in the rate, or will I end up regretting it in a few months?

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Old 07-08-2008, 11:39 PM   #2
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Definitely a crap shoot, and similar to my propane buying decisions.

I'd put together a few scenarios, based on my monthly usage and different price projections, and calculate how much I'd gain/lose in each.

For me, it's always been best to buy a year's worth of propane in June and July.
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Old 07-09-2008, 12:15 AM   #3
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This is primarily driven by an increase in the cost of natural gas, which is how most power in Texas is generated.
Don't know the matter to help you, but I have a curious question. I read major power plants run on coal, which is a lot cheaper than natural gas, and NG is only used during peak hours. I saw somewhere coal price has also been going up.
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Old 07-09-2008, 06:52 AM   #4
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From your other thread you said you pay $300/month. At 18.7 cents/kwhr, that's about 1600 kwhr/month. A savings of 3.7 cents (by locking in the 15 cent rate) would save you about $59/month. If gas prices stay high, you would save $700/yr. It would only take 2 months to recoup your $100 cancellation fee. Gas prices would have to drop below 15 cents before you'd be a loser by locking. I'd lock in asap if I were you.
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Old 07-09-2008, 08:08 AM   #5
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Why would they offer a lock in, unless they thought prices on average would be less than that? Do you really want to bet against a power company on the future prices of power? I suspect they know more about it than you or I.

If I were you, I'd focus on conservation. There are opportunities to save, no matter the price of a KW.

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Old 07-09-2008, 08:11 AM   #6
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Patrick - my thinking was similar to yours. Another reason to lock-in now is that my usage is much higher in the summer (2500 kwh vs. 750 in the winter) so if NG prices stay high for the next few months, I can easily save some money in the short term - if spot prices decrease this winter and I am paying a few cents more per kwh than the market, I don't have that much downside because my usage is less.

ERD - I imagine that power companies are hedging their exposure based on the number of customers that sign up for fixed contracts. So I am not betting against them as much as giving them a guaranteed margin today in exchange for limiting my risk in the future. And I am working on conservation, see my other post on the radiant barrier which I'm working on purchasing and installing.
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Old 07-09-2008, 08:50 AM   #7
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Why would they offer a lock in, unless they thought prices on average would be less than that? Do you really want to bet against a power company on the future prices of power? I suspect they know more about it than you or I.
There are only two possibilities here: either they think prices will fall or else they are able to lock in their costs on the futures market which makes offering a fixed 15-cent rate at least as profitable as offering it at spot plus markup.
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Old 07-09-2008, 09:35 AM   #8
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There are only two possibilities here: either they think prices will fall or else they are able to lock in their costs on the futures market which makes offering a fixed 15-cent rate at least as profitable as offering it at spot plus markup.
It's a total crapshoot. First question is "How many hurricanes will enter the gulf of mexico?" Second question is "How cold will the next winter be?" Third question is "How soon will Japan get their nuke generator back online?"
The rise in NatGas costs the last two months are in anticipation of a hurricane or two or three...causing supply problems in the gulf.

The other driver is the increased costs of LNG. This increase has been driven by the meltdown of the Nuke generation facility in Japan last year, and Japans willingness to pay top dollar for LNG. As a result, LNG tankers have been re-routed to Japan, which has driven up the price for domestic gas stateside.
"IF" Japan gets their nuke plant up within the next year, and "IF" hurricane impact is minimal, then NatGas should drop back to $7 to $8.

Having said all that, and with the relatively low cost of breaking the contract, I'm not sure that a lock in is a bad idea.

Keep us posted on how it works out for you.
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Old 07-09-2008, 10:16 AM   #9
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The other problem with this crap shoot is if the company you choose is strong enough to handle a bad bet on their part.... so far IIRC 4 companies have gone under and their customers have been put to the provider of last resort..

I am one of those customers.... my last bill I paid 21.1 cents per KWH... but had a 'contract' of 11.1 cents... it cost me $147 in one month for choosing the wrong company...

Now I am in the spot... and expect to get the 16 to 18 cent that is happening... but since I am hoping to move soon, did not want to lock in a rate...

The funny part of this whole unregulated market is that WIND power (or any green) always is priced higher than gas or coal... but how can the wind cost more?
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Old 07-09-2008, 10:19 AM   #10
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The funny part of this whole unregulated market is that WIND power (or any green) always is priced higher than gas or coal... but how can the wind cost more?
Part of it may be the initial cost of infrastructure. Another part of it is the "green premium."

A unit of electricity is a commodity. Regardless of whether it costs 2 cents or 20 cents to produce, on the spot market it's all worth the same. So even if "green power" were cheaper to produce than fossil fuel power, all of it will be "worth" the same in terms of what it does. The difference is that the sellers of green power are expecting that some people will pay the spot price of electricity plus some "green" premium.
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Old 07-09-2008, 10:32 AM   #11
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The funny part of this whole unregulated market is that WIND power (or any green) always is priced higher than gas or coal... but how can the wind cost more?
Well, the wind is free but the capital costs are pretty big for building a wind turbine.

Wind Powering America: Cost Trends

I live in Alberta and the majority of power here is coal-generated (i.e. dirty but relatively cheap). I just locked into a 5 yr electricity contract at $0.07/kWh.

I'm pretty surprised by the amount of consumption soup uses....we only use, on average, between 400 and 450 kWh/month, year round. Do you use natural gas to heat your home in the winter or is it electric (that may explain the high usage in the winter months but I'm just guessing).
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Old 07-09-2008, 10:41 AM   #12
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I'm pretty surprised by the amount of consumption soup uses....we only use, on average, between 400 and 450 kWh/month, year round. Do you use natural gas to heat your home in the winter or is it electric (that may explain the high usage in the winter months but I'm just guessing).
I doubt that Alberta needs as much A/C as Texas does.

For what it's worth, I'm also in Texas and I don't have gas service in the house -- everything is electric. Winter heating is through the heat pump and my winter electric bills average a little less than half of the summer bills. We used 1300 kWh last month and usually around 700 in the winter. In the shoulder seasons when little heating or cooling is needed (about three weeks in April and November here!), we may use about 500.
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Old 07-09-2008, 10:41 AM   #13
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Don't know the matter to help you, but I have a curious question. I read major power plants run on coal, which is a lot cheaper than natural gas, and NG is only used during peak hours. I saw somewhere coal price has also been going up.

TX is "special" in its power market. IIRC the state has required utilities to mostly use natural gas in order to encourage the state's drilling and production industry.

Coal is the major source of electricity in the US. The entire world (except for the US) is now in an increasingly serious coal supply shortage and the price of coal has been rocketing higher. Central Appalachia coal (good quality, relatively low sulfur stuff) has gone from $45-$50 a ton to well over $100/ton in the last year. The Asian countries are so desparate for coal that I recently read a report of Powder River Basin coal (low energy content sub bituminous coal) being railed 1800 miles to the port of Vancouver where it was put on a ship (that costs $100k/day to rent and operate) for delivery in Asia. This was unthinkable a year ago. And its getting worse, since China recently shut down dozens of coal-fired power plants due to lack of fuel, and lots of other plants have a few days' spply on hand (vs. the US where generators have an average of 50+ days supply on hand).
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Old 07-09-2008, 10:46 AM   #14
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I just put in the order to switch. Oddly enough, the cost for wind power from the new company was actually a tenth of a cent less per kWh than their standard NG/coal plan. So if wind is cheaper, why not?

Our electricity usage for a 2000 sq ft ranch-style house has ranged from 500 kwh/month in the winter to 2500 in the summer. Since we haven't installed a home tanning salon, I have to believe that the A/C is the biggest factor in our costs. I bought a "kill-a-watt" meter to check usage inside the house but didn't find any big savings there (the VCR draws 5 watts even while it's off). Our water heater and home heating is provided by gas, not electric, so that's probably part of the reason why the electricity bill goes down so much in the winter (the gas bill goes up). If all of your appliances were electric, the bill would even out more throughout the year. And of course, there are some subtle climate differences between Alberta and Texas...
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Old 07-09-2008, 10:51 AM   #15
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I just put in the order to switch. Oddly enough, the cost for wind power from the new company was actually a tenth of a cent less per kWh than their standard NG/coal plan. So if wind is cheaper, why not?
I pay extra for a "green blend" of power, including wind. Lower price would be very attractive.
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Old 07-09-2008, 11:34 AM   #16
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TX is "special" in its power market. IIRC the state has required utilities to mostly use natural gas in order to encourage the state's drilling and production industry.

Coal is the major source of electricity in the US. The entire world (except for the US) is now in an increasingly serious coal supply shortage and the price of coal has been rocketing higher. Central Appalachia coal (good quality, relatively low sulfur stuff) has gone from $45-$50 a ton to well over $100/ton in the last year. The Asian countries are so desparate for coal that I recently read a report of Powder River Basin coal (low energy content sub bituminous coal) being railed 1800 miles to the port of Vancouver where it was put on a ship (that costs $100k/day to rent and operate) for delivery in Asia. This was unthinkable a year ago. And its getting worse, since China recently shut down dozens of coal-fired power plants due to lack of fuel, and lots of other plants have a few days' spply on hand (vs. the US where generators have an average of 50+ days supply on hand).
Thx for info. I remember now reading that some Italian power plants converted to run on coal (from what I forgot). And the coal was imported!

I had some coal mining stocks, and wrote calls on them to generate a bit of cash. Of course some guys later walked to the bank with my stocks, laughing all the way. I am going see if I can buy them back, even if a bit higher. It's frustrating when I got some winners, but thought they had topped out, so wrote calls. Of course they are the ones that smarter people would buy calls on.
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Old 07-09-2008, 11:38 AM   #17
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I had some coal mining stocks, and wrote calls on them to generate a bit of cash. Of course some guys later walked to the bank with my stocks, laughing all the way. I am going see if I can buy them back, even if a bit higher. It's frustrating when I got some winners, but thought they had topped out, so wrote calls. Of course they are the ones that smarter people would buy calls on.
For some reason, the people in charge at work decided I should be the coal analyst. I did the research, understood the supply-demand picture and modelled what a big jump in coal prices would do for coal miner cash generation capability (woohoo!). But I never bought a single share of any coal miner, and in fact I decided to pay extra for electricity that is not generated from coal. I am willing to make money any way I can that I feel is ethical. Chopping off the top of a mountain and dumping it into the stream below so you can scoop out the dirtiest energy source on the planet does not pass the test for me. YMMV.
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Old 07-09-2008, 11:48 AM   #18
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OK, I appreciate your viewpoints. I like a cleaner earth too, but can play the other side's argument. I shall not start a debate here, lest they kick us into the Soapbox, which I do not frequent. It all points to the fact that we all need to conserve, if not for the environment than for the pocketbook.
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Old 07-09-2008, 11:57 AM   #19
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Wasn't trying to pass judgement on y ou, NW, just stating how I feel about it. I am a realist: we do not have the ability to just shut off all the coal-fired plants tomorrow and switch to something else. But I also would not be comfy personally making money from the coal business. And as I said, YMMV.
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Old 07-09-2008, 12:04 PM   #20
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For some reason, the people in charge at work decided I should be the coal analyst. I did the research, understood the supply-demand picture and modelled what a big jump in coal prices would do for coal miner cash generation capability (woohoo!). But I never bought a single share of any coal miner, and in fact I decided to pay extra for electricity that is not generated from coal. I am willing to make money any way I can that I feel is ethical. Chopping off the top of a mountain and dumping it into the stream below so you can scoop out the dirtiest energy source on the planet does not pass the test for me. YMMV.

I kind of agree with your reasoning... and in fact would buy green if it were the same price... or very close...

However, from what I read, they are shutting down windmills because they do not have the power lines in place to get it from 'there' to 'here'... and it would cost $2 Bill to put them in.... and everybody would get the bill since that is the distribution system which everybody gets to pay for..
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