Why To Avoid Fixed-Term Contracts This Summer

By: Morgan Harvey

Why To Avoid Fixed-Term Contracts This Summer

What’s the only job where you can be wrong 90% of the time and still not get fired?

A weatherman. Bada bing!

We’ve all heard this joke before. Not because it’s that funny (or funny at all), but because we expected a sunny forecast only to get torrential downpour and then cursed our local meteorologist for believing he could predict the future.

And predicting the price of energy is no different. Afterall, the price of electricity is very dependent on the weather. Earlier this year, there was a lot of talk of record low energy margins, which, when thinking about the summer heat in Texas, could cause usage and prices to skyrocket.

It was during that time the futures market, where you can buy power months in advance, reacted. The Houston Chronicle reported that the August contract is trading at about $170 per megawatt hour, “more than 60% above last summers’” peak wholesale price of $105 per megawatt hour.

Since this is the price that most REPs are paying for their energy (before they mark it up and sell it to you), any increase in the futures market would eventually filter down to household bills.

The Perils of Fixed Term Contracts for the Summer

Fixed-term contracts for the summer take all the future speculation into account when calculating their rate. If you check Power To Choose, you will see most 3- and 6-month contracts average between 10.5¢/kWh and 12.2¢/kWh.

But if there is anything weathermen have taught us, it’s that predicting this price is hard – temperatures might be cooler, more wind generation could be blowing onto the grid.

So we looked at last summer to see how accurate their predictions were and found out that the day-ahead futures prices were 45% more expensive than the actual, real-time prices during July and August.

Here’s a comparison of day-ahead prices (which most fixed rates are swapped against) vs. real-time prices (the wholesale rate). All the lines above zero are times where Griddy members saved by paying the real-time price vs. the day-ahead price. All the lines below zero are where real-time was more expensive. The result was an average total savings of close to $100 just in July and August!

TL;DR

Most fixed-term contracts are priced on the futures market. Predicting anything, from the weather to the price of electricity, is hard and wildly inaccurate. Because it’s so unpredictable, energy providers who use that futures price have to build in an extra buffer just in case they’re wrong. That means you’re paying for spikes that could happen whether or not they actually occur. In fact, last July and August the real-time price of electricity beat out futures prices by 45%. In conclusion, just buy the real-time, wholesale rate.


Sign up for Griddy today to get access to wholesale electricity for only $9.99 a month. No contracts. No early termination fees. No mark up. Only fair and transparent pricing to keep your house cool this summer.

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