For those of you who missed Eloise Gibson’s stuff.co.nz article titled “People Missing Out on Cheap Power”, here it is. It’s a good insight into the perils of fixed-term contracts, and why it’s wise to shop around:
Thousands of people are missing out on lower electricity bills after locking themselves into fixed-term contracts.
The contracts are in the spotlight because the Commerce Commission has forced lines company Vector to drop its charges by an average of 9 per cent , delivering lower bills to many Aucklanders and Northlanders.
However, customers of most large retailers on fixed-price contracts will not benefit until their contracts expire.
Just how many people will miss out on Vector savings is difficult to estimate as the lines company didn’t have to spread the savings equally. Some households, especially low power users, would have paid up to 1.2 per cent more in higher lines fees. But the average effect of the commission’s order was lower bills.
Fixed contracts are hurting consumers who signed up on the assumption power prices would keep soaring.
For some high power users the deal has turned out so much more expensive they would be better off paying a $150 break fee, Consumer NZ has calculated.
Consumer NZ looked at bills for one central Auckland customer with high power use and calculated his three-year fixed price contract from Mercury had cost him $390 above standard rates.
Fixed-price deals often charge a premium early on and feature expensive break fees, though some also offer discounts, for example higher prompt payment bonuses.
None of the big four retailers will disclose how many Vector customers they have on fixed-term contracts. But it is likely to be several thousand.
Meridian, which at its last annual report had more than 100,000 North Island customers, has 58 per cent of customers in the Vector area on fixed prices. Mercury has 80,000 on fixed contracts nationwide. Contact refused to reveal any fixed-term figures, while Genesis said it had “several thousand” Aucklanders on fixed-term contracts expiring in December.
Fixed terms provide certainty against residential electricity prices, which until recently were climbing relentlessly.
But now the energy component of power bills – the other main cost apart from lines fees – is tipped to flatten or rise more slowly.
Ari Sargent, CEO of Powershop, says other retailers engaged in “scaremongering” to sign consumers up.
“Certainly from a wholesale market perspective the signs were there from post-2008 that the economy was slowing, demand was softening and there were a number of [electricity] plants coming on stream. Two to three years ago prices were rising quite sharply, but I think retailers would have known that that was likely to soften and probably deceived a lot of customers into thinking they would continue to increase the same way.”
Mercury’s three-year contract, offered in 2010, committed users to an immediate 9 per cent price hike, Consumer calculated. Mercury’s 2010 letter to customers read: “It feels like the cost of living never stop rising. Over the past three years the average power bill in Auckland has gone up from $1636 a year to $1940. We believe this rising trend is set to continue.”
Mercury declined to respond to Sargent’s criticism.
But Electricity Authority chief executive Carl Hansen said industry players could not have been expected to foresee Vector’s price drops.
Consumer chief Sue Chetwin said fixing suited some people but bill payers should take extra care, especially now that prices rises looked like they may ease.
“You already have people saying that if Rio Tinto isn’t able to reach an agreement with Meridian there is going to be a heck of a lot of excess electricity available.”
Sargent predicted prices would flatten regardless of what happened at Rio Tinto’s Tiwai aluminium smelter. “Transpower’s [national grid upgrade] increases are almost through the pipeline so you’d expect some more increases in that next 12-14 months but not as big as they have been.”
Chetwin said it was worth shopping around even if consumers had fixed their contracts. Using its comparison site Powerswitch.org.nz, Consumer found the Auckland customer electricity plans that would save him more than the $150 early termination fee he would pay to ditch Mercury. The man was a high user, spending $4520 a year on electricity and gas, so his potential savings were bigger than most people’s.
Mercury has offered its fixed-termers an extra year on the contract to alleviate missing out on Vector’s price drop. But Consumer concluded that for the customer in the case study, the offer probably wasn’t worth it.
“After three years, we calculate he’ll have already paid $390 above standard rates. It’s a big gamble to assume he’ll recoup this in year four,” it said in a blog post.
Hansen said fixed terms were valuable for retailers, so signing up was a good chance to negotiate a better price.
“If a retailer is offering you a two or three-year contract, that is a great time to seek significant savings because they know that if they get you they have got you for two to three years.”
Powershop, which encourages customers to shop around for energy deals, is owned by Meridian Energy and does not offer fixed terms. Mercury Energy is owned by Mighty River Power.
By Eloise Gibson on stuff.co.nz
