a big line going up over a wind turbine
Power bills are even harder to pay when the cost of living is high

PartnersJuly 30, 2019

Spot price vs fixed rate: how transparency is changing the electricity market

a big line going up over a wind turbine
Power bills are even harder to pay when the cost of living is high

OPINION: Our new series with our partner Flick is all about helping you make better electricity choices. In this instalment, Flick’s Nikki Cockburn explains the difference between fixed rates and spot prices.

Unless you’re a power company or a big boss business in New Zealand, traditionally you were only able to pay for power in one way. Power retailers buy electricity on the wholesale market at the spot price, then charge you a fixed rate for that same power when they sell it on to you. You pay the same price per kWh of electricity you use (a kilowatt-hour is a unit of energy), regardless of what the spot price was when you used that power.

Here in New Zealand, we have five main electricity generators – Meridian, Contact, Mercury, Genesis and TrustPower, plus a couple of smaller generators too. Between them, they produce electricity from different sources, like thermal, gas and coal, renewable hydro and wind, and they all use the wholesale market to sell it. Power retailers then sell that electricity on to Kiwi households and businesses. The ‘spot price’ is the price of electricity on the wholesale market, and it changes every half hour. And now, with a few new retailers like Flick, you can pay spot prices for your power too.

The rate at which retailers fix their prices is generally reflective of historical and forecast spot prices, other industry costs like network or lines charges, as well as internal operating costs. But to make things a little more complex, most fixed-rate power retailers will sure up their return on fixed rates by hedging on the wholesale market.

Hedging is where retailers purchase a specific amount of electricity from a generator at a fixed price, over a long period of time. It’s basically like a form of insurance, helping to manage market volatility, and historically retailers who’ve hedged have paid more than the spot price by using the hedge market. But it means they’re able to offer you a fixed rate that they know won’t lose them money.

Most NZ power retailers use the hedge market to purchase their electricity, so they know the price they’re paying for power in advance, and they’ll then set their fixed-term contracts (or any special offers) accordingly. The amount that retailers pay for their hedges is not generally made available to the public.

Obviously, power retailers won’t ever plan to operate at a loss. When you sign up to a fixed-rate plan, you can expect to pay a higher average per kWh price for your power long term than you would if you were paying spot prices. 

The flip side of this is that fixed rates protect from high spot prices, which can occur from time to time. While you might benefit from average or low prices 82.09% of the time, you need to also be comfortable riding out a few high price events. Take a look at the chart below to see how spot prices landed from Mar 2016 – Feb 2019.

Image: supplied.

The Flick app lets Flick customers view the real-time price of electricity, including the spot price for each customer’s area from WITS (run by NZX). It can also be configured to send alerts when prices are exceptionally low, or spiking high. For folks who aren’t Flick customers, the app gives an indication of where the current average spot market price is sitting.

With more transparency around the price of electricity, you’ve got more power over the way you use it, and what you pay for it.

This content was created in paid partnership with the Flick. Learn more about our partnerships here

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