Texas electricity suppliers offering fixed rates to consumers often have cancellation fees or early contract termination fees associated with their plans. To better understand why energy suppliers in Texas charge cancellation fees, you must understand how electricity trades and what’s behind a fixed electricity rate.
Fixed TX Electric Rates
When you see a fixed rate plan offered by an energy company in Texas, you have to understand how the supplier is offering a fixed price. Since electricity is a commodity, it has a market where prices change daily. In fact, like the stock market, electricity prices are in constant motion.
So, when a supplier offers you a fixed electricity rate, they are gambling that the electricity market will not go above that rate throughout the term of your contract. Many contracts are for 1, 2, or 3 years, so this risk for the supplier is quite high.
How Suppliers Purchase Power
In order to offer a fixed rate contract and not take on the risk of the market, suppliers pre-purchase electricity ahead of time at a certain price. For example, let’s assume that the wholesale price of electricity today is $0.04/kWh. If a supplier, pre-purchased enough electricity to supply a customer for the next two years at that rate, they might offer a fixed rate of $0.05/kWh and still turn a profit.
This pre-purchasing of electricity is quite common and allows suppliers to help customers by purchasing electricity on their behalf at a fixed price in the market. As a customer, you can simply sign a contract with an energy supplier and pay each month for your electricity as you use it. But, if you decide to cancel your contract early, it creates many problems for the supplier.
In order to lower the risk of a fixed-rate contract, energy suppliers in Texas often include an early termination fee or cancellation fee in their contracts. This fee can range from a flat amount to a custom amount based on the time you have left on your contract when you cancel.
These cancellation fees are in place to deter customers from leaving their fixed contracts too early so that suppliers are not left with energy that was already purchased. If you cancel and market prices are lower than when you signed, the supplier could be left with energy that it is unable to resell to other customers. In this scenario, the supplier would incur a loss. The cancellation fee helps the supplier not take these losses should a customer not honor his/her contract.
If you would like to learn more about cancellation fees and energy contracts, please contact one of our expert energy advisors today.