Energy Insights

Spot Price vs Flat Rate… how does it affect me?

By Genesis Energy | 18 July 2017

There have been several news items in recent weeks about wholesale (or ‘spot') electricity prices going up at a great rate of knots. Low hydro lake levels in the South Island, combined with the colder weather, have seen the price that energy retailers pay to buy electricity more than double in the last month. This is not unprecedented in this country, but the last two years have seen supressed wholesale electricity prices, and a low level of volatility. That's all changing now.

The graph below shows the average monthly wholesale spot electricity price over five years. As you can see, over the past two years (the blue shaded period in the graph) wholesale prices have been fairly stable. However, the recent dramatic spike up in June (the orange shaded area) is very clear to see, and will likely result in a hefty dose of bill-shock for customers whose electricity retailer passes wholesale spot pricing directly through to them.

Monthly Average Wholesale Electricity Spot Prices*

Spot versus flat-rate electricity pricing * Monthly average wholesale electricity price at main nodes. Source: Electricity Authority.

We could now be heading into another period of extreme volatility in wholesale electricity prices, like that experienced from 2012 to 2015 (the red shaded area in the graph above), or with a good bout of rain in the Alps and a mild winter, they could come down again to 2016 levels.

The point is – who knows? And as the wholesale electricity traders are running round with excitement at a return to pricing volatility, we ask what this means for you – the residential customer?

With some newer entrants offering wholesale pricing to customers, and selling it based on what they say are significant savings (often quoting historical data based on that recent period of low volatility we talked about earlier), we think it's important you understand how wholesale pricing works.

So how does wholesale pricing work?

The wholesale generation cost/price is the price that electricity retailers pay to buy electricity from the wholesale market. This wholesale cost of electricity typically makes up around a third of a residential customer's bill – the rest being made up of lines company charges for transmission and distribution (getting the juice to your house), metering costs, and other service charges from your energy retailer.

If you're with an electricity retailer that uses spot wholesale pricing to calculate your weekly or monthly bill, the rate you pay for your electricity will depend on the market price at the time you're using it – and as we've shown above, this can vary greatly.

One of the drivers of the variability is demand. Therefore prices will typically be higher at high-use times of year (like winter), and will also spike at breakfast and dinner-time, as people are cooking or showering.

Choosing an electricity plan based on spot wholesale pricing might work if you're happy to have your energy bill go up and down quite a lot from week-to-week. But you will need to have the time and inclination to monitor those prices, and manage your energy use around them, to avoid significant bill shock.

How does this compare to flat-rate pricing?

Most electricity retailers in New Zealand (like Genesis Energy) charge their customers for power at a flat rate throughout the year, meaning you're paying the same price for your electricity whatever the underlying wholesale price is doing.

Sure, on flat-rate pricing you might pay a bit more for your electricity during summer, or in off-peak periods during the day when demand is lower, but when demand is higher (like in winter when it's cold and you want to turn your heater on) you're often paying less. Winter is usually when your power usage is at its highest, and you can least afford to end-up paying for that power at a higher rate. That's when we're all wanting to keep our homes toasty-warm, take a long hot bath, and maybe even whip-up a roast dinner or two!

Flat-rate pricing serves to make energy bills a lot less lumpy, and there are several benefits of this:

Budgeting

Your power bill is often one of your higher regular household expenses after your rent or mortgage payments. Like flat-rate electricity, with a mortgage you can choose to fix your payments for a period of time and even though you may pay a little more in the long-run, you have protection against the risk of the floating rate getting out of control.

How would you cope if your mortgage payments were based on half-hourly interest rate changes? This is what spot-price electricity plans are like, and it certainly doesn't make planning or budgeting each week or month very easy.

The price you're paying won't go up just because demand is high

While it won't be the case all the time, winter is when the wholesale price for electricity often spikes. And that's when it's hardest to cope with higher prices, when electricity demand is likewise at its highest. You're at home more, days are shorter and nights are longer, and your heating and lighting costs will increase in turn.

With flat-rate pricing, even though you may be using more power during winter, you'll be paying for it at the same rate all year round.

Given the electricity wholesale price only makes up around a third of your total bill, you're likely to get greater savings from being more energy-efficient in general – and thinking about the total power you're using, not when you're using it. See our tips on energy efficiency.

Protection against the unexpected

Do you have an insurance policy to protect your house, car or belongings? Insurance covers you against the unexpected – you pay a premium to make sure you're not hit by any sudden shocks that you'll find it difficult to manage financially. Electricity retailers like Genesis Energy take on the risk of the fluctuating wholesale power price and spread it over a year, so you don't have to.

Different folks, different strokes

At the end of the day, wholesale spot-based pricing can suit those who are happy to be highly engaged with their power and when they use it, are prepared to keep a close eye on the market price at that time – and are capable, both financially and emotionally, of riding the price-spike ups and downs.

Flat pricing on the other hand will suit those who wish for greater convenience and lower involvement, more certainty in their power bill, and a smoother ride.

So whether you're more of a stockmarket player when it comes to power, or you're happier with the energy equivalent of a government bond, both forms of pricing have their pluses and minuses. The most important thing is to always be aware of what you're getting yourself in to, and conscious of your reasons for choosing your energy provider.

 

Back to Top

 

Related content