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Record heat, but not record electric prices?
Houston's 2011 summer heat and electric prices

Posted by Shane McLaughlin on 12/21/2011 at 12:02 PM

Every quarter, I plan to take a look back at trends in Houston-area electric prices and highlight information that may better equip you to choose an electric plan when your current contract is up for renewal. Let’s start by looking at last summer, which was one for the record books. With record drought and heat, you might have thought that electric prices would have also risen to record levels.
 
For some customers on variable-rate plans – those whose prices can change each month – they did. Record electric consumption and statewide power shortages led to a spike in the price electric retailers paid generators in the real-time and day-ahead markets, and this may account for a similar rise in month-to-month prices. One co-worker of mine saw his price jump to over 20 cents per kilowatt hour. Ouch!
 
But for customers signing up for fixed-rate plans, prices hardly moved at all. Look at the summer months near the center of the CenterPoint Energy Electric Price Index (below). You can see that Index values for standard one-year and two-year fixed-term plans averaged just over $100 and $105 respectively. Prices for those longer-term plans over the last year, including last summer, have been very stable.
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Why were fixed-plan prices so stable?
 
In Texas, natural gas makes up nearly half of the fuel mix used for generating electricity. Fortunately, as the chart below shows, the price of natural gas declined all summer.
 
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So too did natural gas futures prices, which show the current price of purchasing natural gas at various points in the future. While a number of factors ultimately influence the price you and I pay for electricity, the cost of natural gas is a key ingredient. This year, falling natural gas prices gave retail electric providers confidence that the price they pay their suppliers would be stable, or even falling. (Remember, retail electric companies have to purchase the power they sell consumers from electric generation companies). This gave them the confidence to keep the prices of their one and two-year plans stable as well.
 
What it means for you
 
If you’re currently in the market for a new contract, it’s worth taking a closer look at 2011’s fixed-rate trends. Prices for one-year and two-year plans have remained stable, and if long-term price certainty is important to you, such plans could be attractive.
 
For those of you willing to accept a future price risk in order to get a lower rate now, six-month plans may be worth a closer look. In both 2010 and 2011, six-month prices were at their lowest during the fall/early winter, and at that time, six-month plan prices were lower than one and two-year plan prices.
 
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As shown above, six-month plans followed a distinct seasonal curve in 2011 that reached its peak in the summer and its low in November. It’s important to note that even though six-month plans hit this annual low during the fall, if 2010 is any indication, prices could begin to climb as we enter the new year.
 
Risks of six-month plans
 
Be aware that if you choose a six-month plan, there are risks. The biggest one is that prices will be higher in the summer, just at the time that a six-month contract begun this month will expire. In 2011, the price of six-month plans in the summer was about the same as one-year plans and less than two-year plans. There’s no guarantee that will be true in 2012. Still, for the savvy shopper willing to manage their purchases closely, six-month plans may be worth considering.

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