Is a spot price contract right for me?
Some retailers now offer pricing plans based on spot prices. There are risks and benefits associated with moving to a spot price contract.
What is a spot price?
A spot price is the price retailers pay when they buy electricity from the wholesale market.
Spot prices change every half-hour and can vary quite dramatically depending on supply and demand. Typically spot prices are higher during winter, and weekdays at breakfast and dinner time.
What does buying power at the spot price mean?
Most electricity retailers charge customers a flat rate. This means you pay the same rate for the electricity you use regardless of when you use it, and regardless of the spot price your retailer paid. Residential customers can instead sign-up to a retailer that offers a spot price contract. This means what you pay for your electricity will vary depending on the spot prices.
Spot prices change every half-hour, so you would be charged a range of rates.
Buying power at the spot price can have advantages. When spot prices are low, it may mean you pay substantially less for electricity than you would on a traditional retail contract where the price is the same all the time.
But, the same is true in reverse. If spot prices increase above the flat rates charged by retailers, you may pay substantially more than you would on a traditional retail contract.
If you are considering a spot price contract you should think about whether you can:
- budget for electricity bills that vary month-to-month and will sometimes be higher than a traditional retail contract
- use less power at times when the spot price is generally higher (for example, by switching to alternative heating fuels like wood or gas)
- temporarily reduce your power usage in response to particularly high prices by either:
- using less power (for example, by having shorter showers)
- shifting some power usage from higher-priced to lower-priced periods (for example, using a dishwasher, washing machine or dryer at off-peak times)
It may also be useful for you to:
- actively monitor your power usage (if you have a smart meter, retailers often provide online tools or mobile apps to help you do this)
- actively monitor spot prices (ask your retailer if they can provide online tools or mobile apps to help you do this)
If you choose to take up a spot price contract but find it does not work for you, or you want to return to a conventional contract when spot prices are high, you may find that other retailers wish to impose conditions on contracts (for example, a fixed term agreement) if you want to switch to them.
How could spot prices affect my bill?
Spot price contracts come with risks and rewards.
The rewards could be paying a lower price for your electricity over the medium to long term. The www.powerswitch.org.nz website allows for some estimation of the potential rewards of a spot price contract.
The risks are created by periods of higher than normal spot prices. A history of spot prices going back to 2009 is available using the ‘wholesale energy prices’ report available from www.emi.ea.govt.nz. A period of higher than normal spot prices might last for a long period of time if hydro lakes are low, or they might only be for a short period of time but include especially high spot prices (for example, if a power station suddenly shuts down).
To help you to estimate the risks of buying electricity at the spot price, we’ve created two examples of both of these scenarios to show the possible impact on your bill.
What should my retailer tell me if I’m on a spot price contract?
To help consumers understand more about the benefits and risks of being on a spot price contract, we expect retailers to:
- ensure potential customers are fully informed before they take on a spot price contract
- clearly communicate the risks as well as the benefits of spot prices to their customers
- at appropriate intervals, provide guidance about how to make best use of the spot price deals on offer
If you’re on a spot price contract and you don’t feel your retailer is communicating effectively with you, please contact email@example.com with your concerns.