Competition breeds new ways to buy electricity
Aug 18, 2013 at 8:00 PM
Electric bills have long been take-it-or-leave-it affairs: Pay one rate for all the power you used the month before, no matter when you used it.
But some electric companies want to shake-up that rigid business model. They are increasingly offering plans that sound like come-ons from mobile phone companies: Free nights, free weekends and pre-paid plans.
"We are seeing a transformation in the way people buy and use electricity in the U.S.," says Steven Murray, president of Direct Energy's residential energy programs.
The more customized plans are made easier by the growing use of digital meters that wirelessly link electric companies and customers, allowing both to track usage in real time. Digital meters have not only spurred competition, they have also enabled traditional utilities to reduce their costs by encouraging customers to use electricity during off-peak hours, when it is cheaper.
Forty-two percent of U.S. electric customers have digital meters, up from less than 5 percent in 2008. In 2015, more than 50 percent will have them, according to Navigant Consulting.
This new breed of electric plans comes with risks.
Customers can end up paying a lot more for power than they expected. Some plans offer low introductory rates that can quickly skyrocket. Others have high early-termination fees. Some fixed-rate plans are a great deal if power prices rise, but they may seem awfully expensive if prices fall.
If customers are careful, though, they can pay less.
Dorothea Miller of Sinking Spring, Pa. signed up for a Direct Energy plan that gives her one day of free power every week. She picked Saturday, and now saves as much of her housework as she can until then. She stops short, she says, of letting mountains of dirty laundry or dishes accumulate in anticipation of Saturday's free power.
"We pretty much run things the way we did before the plan, but now we set our dishwasher to go on after midnight (Friday) and do most of our laundry on Saturday," she says.
TXU Energy offers a similar plan to Texas customers that offers free power every night from 10 p.m. until 6 a.m., or free power Saturdays and Sundays, in exchange for a higher rate during other times.
Customized plans are most prevalent in the 13 states and Washington, D.C., where regulators have allowed companies to compete to sell electricity. In those states, the number of customers that have signed up with electricity suppliers that offer these types of plans rose to 13.3 million in 2011, from 8.7 million in 2008, according to the most recent numbers from the Compete Coalition, a group that lobbies to expand competitive electricity markets. The plans are also popping up in other states.
Electric competition has been around for more than a decade and utilities have experimented with pricing plans for even longer. But digital meters have made these plans easier to offer and manage. They are being installed around the world; utilities in China, Japan and across the European Union have aggressive plans to expand the use of digital meters.
In the U.S., companies have different motivations for offering innovative plans. Traditional regulated utilities are trying to reduce stresses on their grids. Upstart power providers are trying to lure new customers.
In both cases, they are trying to get customers to use less electricity when it costs more. Wholesale power prices fluctuate depending on the time of day, from zero overnight to thousands of dollars per megawatt-hour during a hot day.
Yet most customers see one average price every month, a price that includes those sky-high peak rates. With plans that offer prices that vary based on the time of day, customers can avoid high-cost power in the same way air travelers can save by not flying on the Wednesday night before Thanksgiving.
Power providers use fleets of pushy door-to-door sales people, pop-up-booths in malls and tens of thousands of mailed flyers to sign up customers. But it can be difficult to get people to switch because most people don't think about electricity unless they lose it, and the cost of electric bills isn't a major concern.
"It's not like an entertainment purchase where you can see the reward," says Bruce Stewart, chief marketing officer for Constellation Energy, the retail arm of Exelon Corp.
U.S. power prices have been mostly flat or declining since the mid-1980s, adjusted for inflation. A typical residential customer spends $110 per month on electricity. That's one-third the average amount spent by a family on gasoline.
Power providers have only had success attracting customers in the past when electricity prices are falling sharply because they can offer a quick, obvious savings compared with what the traditional utility offers. But now that 60 million customers have digital meters, they can offer plans that help customers save money based on how and when they use power, not just with a cheaper price.
Direct Energy ran a simple, silly TV advertisement pitching its free power day that included a woman blow-drying her golden retriever — why not, if the power is free? Oklahoma Gas & Electric offers a plan called "SmartHours" that offers lower rates to customers who cut back on power usage during hot summer afternoons, along with a thermostat that can adjust itself based on electricity prices.
"To differentiate yourself you have to craft a product that makes things easier," says Bill Massey, a former federal energy regulator now at the Compete Coalition.
Companies are offering pre-paid electric plans that, like pre-paid mobile phone plans, can be cheap and include no sign-up fees or deposits. Customers get text and email alerts when they've used most of the electricity they've paid for. By paying attention to their use they use less, which lowers their bills further. Prepaid customers can have their power cut more quickly, though, if they have trouble paying for more electricity. In Texas, for example, if a prepaid balance falls below a certain level, power can be cut in as little as a day after the power provider issues a warning.
"Some (new plans) will be good for some people and some will be very very bad for other people," cautions Janee Briesemeister, a senior legislative strategist who works on electricity issues for the AARP.
This week New York's electricity regulator threatened to block a power provider called Buy Energy Direct from operating in the state over complaints that it signed up customers who never intended to sign up, a scheme called "slamming."
"It's even more confusing than shopping for a cellphone contract," says Briesemeister.
Many in the industry think that companies will learn to offer ever more straightforward and useful plans in order to woo and keep customers, and customers will learn to shop for electricity the way they shop for phone or cable service.
"The industry is only at the beginning of learning to understand their customers and figuring out what people want to do," says Brain Seal of the Electric Power Research Institute, an industry-funded technical group.