Winter Polar Vortex’s Biggest Lesson: Supplier Transparency Is Key
The history-making 2013-2014 Winter Polar Vortex dramatically demonstrated the importance of energy supplier transparency. With both demand and prices reaching record highs, users need to fully understand the energy supply products they are purchasing, and also need to be aware of the way that risk is being shared between customer and supplier.
The unexpected extremes of the Polar Vortex reminded us that energy users need to be vigilant. Customers should always make educated decisions when purchasing their energy supply. In a marketplace that often defies prediction, the energy consumer needs to fully comprehend the range of risks and benefits that may be associated with the contracts they sign.
According to our recent white paper, the 2013-2014 Winter Polar Vortex: What Happened, Why Prices Spiked, and How Consumers Have Been Impacted, the most-powerful contributors to last winter’s high prices were pipeline constraints that elevated the cost of transporting natural gas to electric generators in the Northeast and Mid-Atlantic. In addition, spikes in electricity consumption at the same time exacerbated the impact. At one point in January, spot gas prices, which are a main driver of electricity prices, at a New England transmission connection reached 878 percent higher than the 12-month average.
And the trend may continue. Industry observers say the region is “likely to experience high prices over the next few winters as well, with structural relief at least a few years away.”
The dramatically cold weather also posed repeated threats to grid reliability. The PJM Interconnection, serving more than 60 million electricity consumers in 13 states, issued a series of warnings and requests for curtailment in January.
Amid the price turmoil, customers who had locked in to “true” fixed-price contracts experienced no impact to their unit price. In contrast, users not locked into a fixed price contract but who instead had purchased variable, market-based products, saw major increases in their bills last winter.
However, some so-called fixed-price contracts were ultimately no guarantee of price stability for some customers.
A few suppliers, having failed to purchase product beforehand in a way that would allow them to sustain the fixed prices they had offered, went out of business when record-setting wintertime costs took hold. Their now-abandoned customers, dropped back to utility default service, were often then forced to pay prices exceeding the “fixed” price they had originally budgeted for.
In addition, many ostensibly “fixed-price” agreements in reality require users to bear substantial pass-through costs. Many non-energy components of an electricity price, such as capacity and transmission costs, now comprise a growing proportion of total electricity cost, and these cost components are often unexpectedly passed through to customers.
Customers need to be fully educated. They must review their contracts carefully to differentiate costs that are truly fixed from those that may be passed through and know how the supplier has interpreted key contract language in the past. Energy users need to match the contract being offered to their own risk profile, and have an understanding of the market’s current and recent price environment. The Winter Polar Vortex reminded us that the smartest energy user leaves as little as possible to chance. In a market like this, customers should be fully informed about how fixed their ‘fixed’ price is, about risks associated with variable-price products, and about their supplier’s financial stability.
Information in this article was taken from the 2013-2014 Winter Polar Vortex white paper issued by ConEdison Solutions.
Richard D. Rathvon is vice president for retail commodity services with ConEdison Solutions. He leads the company’s retail electric and gas commodity businesses, including sales, marketing, product development and support operations. ConEdison Solutions, based in Valhalla, NY and with offices around the country, is a leading energy services company providing competitive power supply, renewable energy, sustainability services, and cost-effective energy solutions for commercial, industrial, residential and government customers.
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