But first about the concept. Fixed price of electricity means that a customer and an electricity seller agree on the price per kilowatt hour of electricity, which does not change during the entire contract period. In other words, the price of electricity is fixed for a certain period of time, and customers can precisely plan their electricity expenses in advance. For example, about 62% of Eesti Energia’s more than 475,000 household customers have decided in favour of a fixed price.
However, even in the case of a fixed electricity price, questions arise as to why the same electricity seller offers me one price, but another price to my neighbour, and for what reason it can change over time.
The development of a fixed electricity price is influenced by the following main components:
The electricity consumer’s habits, i.e. for how long they wish to fix the price of electricity and what is their expected consumption volume (predicted based on previous electricity consumption).
Since electricity sellers buy electricity from the market in advance for their customers, the prices are affected by what is currently happening on the power exchange. If exchange prices rise, the prices at which electricity sellers buy electricity in advance and at which price they resell it to their customers also rise.
Risks that must be mitigated by fixed prices offered by electricity sellers:
- The forecast electricity consumption volume and the actual consumption volume do not match. For example, an electricity seller predicts a customer’s consumption of 500 kilowatt-hours per month, but the actual consumption is 600 kilowatt-hours. This means that the seller has to buy an additional 100 kilowatt-hours from the electricity exchange at the market price and cover it from own costs.
- All electricity contracts must be serviced on the electricity exchange. Trading on the electricity market takes place one day in advance. No one can predict with 100% accuracy how much electricity one or another customer will consume the next day. Surplus or missing electricity is billed in the market of the system operator (Elering in Estonia), where a price difference occurs with the price of electricity sold on the market. This risk is assumed by the electricity seller.
- A customer’s profile cost is also included in the contract. This occurs in a situation where a customer consumes more electricity in more expensive hours and less electricity in cheaper hours. This risk is covered by the electricity seller.
- In the period between quoting the electricity price and concluding the contract, the electricity purchase price may change. For example, a customer receives an offer for 15 cents per kilowatt-hour, and the offer is valid for three days. During the mentioned time, the electricity purchase price may change and rise, for example, to 18 cents per kilowatt-hour. If the customer decides to conclude a contract within three days, the electricity seller must pay the price difference.
- The customer terminates the electricity contract before the deadline. For the electricity seller, it is a risk if the market price of electricity falls by the time the contract expires, and they have to sell the more expensive electricity back to the market at a lower price. That is why a fee for early termination of the contract is applied to some fixed-price electricity packages, depending on the annual volume of electricity consumption and the time of termination of the contract.
- The risk that arises when the customer does not fulfill their obligations and fail to pay electricity bills.
Reasonable profit margin of the electricity seller covering the costs related to the provision of the service.
In conclusion. The fixed electricity price quote to each consumer depends on the amount of electricity consumed and the length of the contract period, the purchase price of electricity on the electricity exchange, the risks of the electricity seller and a reasonable profit margin. Some of these components are different for consumers, and therefore the fixed electricity price quote varies from customer to customer.