In the next articles I will explain how the electricity and gas market works and how to understand bills.
For now, suffice it for you to know that today we are talking about the price of energy, a component of the electricity bill that changes from supplier to supplier and is negotiated (IF you have a good consultant, otherwise it is just signed…) with each new contract.
The types of prices proposed by suppliers fall into two broad categories:
1 – FIXED PRICE
In this case, the price set in the contract remains UNCHANGED throughout the agreed upon duration of the supply, usually 12 or 24 months.
Not all fixed-price contracts are the same. In fact, the agreed price can be:
- “MONORARY.” It means that the electricity you draw costs you the same at any time of the day (or night).
- “ON THREE BANDS.” The hours of the week are divided into three categories (called F1, F2 and F3) and a price is matched to each category. The amount you will have to pay will then also depend on WHEN you consume.
- “PEAK/OFF-PEAK.” Again, energy
electricity costs you more or less depending on when you consume it, but the hours are divided into only 2 categories.
To understand what hours fall under each bracket read our FAQ! Be aware, however, that each provider may propose different divisions…pay attention to what’s in the contract!
Benefits
Neglecting for the moment the other items on your bill, the amount you will have to pay under a fixed-price contract will simply depend on your consumption (and thus on the “kWh” shown on your bill). This means that if you know HOW MUCH and WHEN you draw energy then you are able to perfectly predict how much energy will cost you, with no surprises. You can plan your energy spending with complete peace of mind.
Risks
Imagine that the price of diesel fuel that you pay in January binds you for the whole year: no matter if after a week the oil market has collapsed and your shed neighbor fills up the entire company fleet with €50, you still pay the same amount.
The same happens with energy: if prices in the market drop precipitously, all you can do is wait to sign a new contract.
2 – INDEXED PRICE
In this case, the price charged for the electricity you consume CHANGES IN TIME, usually monthly.
In particular, you need to pay attention to two aspects:
- What is the reference index adopted?
The VARIABLE part of the price depends on the reference index. One of the most widely used is the monthly average of the “PUN,” which stands for “Single National Price” and represents the trading price of electricity on the national power exchange. However, there are also indexes linked to other parameters, such as the price of oil or other fuels.
- What is the “spread?”
The identified index is increased by a FIXED value determined by the supplier and called a “spread.”
Even in the case of indexed prices there can be differences based on the time of consumption. In some cases it is also possible to negotiate mixed formulas with suppliers, in which the indexed price applies only to a part of your consumption.
Benefits
Having a variable price allows you to follow market trends and thus, in some cases, achieve very significant savings. This is what happened this year. As you see from the table below from January to June 2016 the PUN dropped quite a bit:
Thus, a company consuming, for example, 60,000 kWh/month saved more than €3,000 in these 6 months (about 6 percent of the cost in the bill) thanks to a DOT contract compared to a fixed-price contract.
Risks
As you can imagine if market prices go up so does your bill. So what was an opportunity for savings becomes a risk of higher costs. The inability to plan with absolute certainty how much your electricity will cost you can be a problem.
So WHICH DO I CHOOSE?
The price of energy is influenced by many factors, some not easily predictable. Companies where the cost of energy is heavily reflected in the final price of their product normally prefer the certainty of a fixed price. Conversely, there are companies that can “afford” greater fluctuations in the purchase price of energy and therefore are willing to take a risk with an indexed price.
Beyond the characteristics of your company, however, there are some aspects to consider that can help you in your choice.
4 rules to help you
The lack of crystal balls and time machines does not mean you have to rely on instinct or trust placed in the first supplier/friend/relative who offers you a supply contract.
In fact, there are rules you can always follow:
- Assess the market. You need to know whether you are at a time when energy prices are skyrocketing or at historic lows so that you can recognize whether the fixed price or spread they are proposing is absurdly high. Each week Energika sends its customers a small report with price trends and key indices.
- Hidden price. Whether it is fixed or indexed price check well what is included or excluded and that it is clear if and how the price varies over time. To avoid nasty surprises, one must read all the clauses of the contract carefully.
- What is best for YOU. The ideal offer for your neighbor may not be convenient for you. For a reliable bid comparison you must also evaluate WHEN you consume and the presence of special clauses/bonuses within the contract. If doing these accounts by hand seems absurd to you, you are right. We use software that compares hundreds of offers in seconds, simulating consumption scenarios and index trends .
- Don’t give up. If you find that the contract you signed (alas) is costing you thousands, it is essential to withdraw as soon as possible so that new prices can be renegotiated as soon as possible. When prices in the market are particularly low, you can also choose to sign a contract today that will run for next year.
Do you want assistance in choosing a provider? Do you know how to withdraw from your contract?
If you have concerns about your bill or want to know if the contract you signed is penalizing you CONTACT US NOW!
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