Some ABCs (aggregators/brokers/consultants) may tell you they can save you money if you cancel your current energy contract and sign with them for a much “cheaper” price. This is not necessarily true. When you sign an energy contract with a supplier, you are committing to use a certain amount of energy from that supplier over the term of the contract. These contracts are often referred to as “obligation contracts” – the buyer is obligated to use the amount of energy agreed to during the term of the contract.

So, if you cancel your contract early, your supplier will will most likely send you a bill for “early termination fees” or ETFs. These ETFs can be expensive as they typically cover the supplier’s costs for all of the “unused” energy remaining on the contract.

Of course, you may ask, if the energy is “unused,” how can the supplier have costs?

Here’s an analogy:

Assume Tom wants to buy apples. He goes to Apple Co. and agrees to buy 10 apples a month for 3 years (360 apples). To ensure it can meet its contractual obligations to Tom, Apple Co. contracts with a wholesale apple grower to buy 10 apples a month for 3 years. The grower then plants trees and buys equipment so he can supply Apple Co. with the apples.

Now assume, 12 months into the contract, Tom decides to stop buying apples. while he thinks he is just stopping his contract for future, to-be-grown apples, he is really starting a cost chain-reaction. Tom stops his contract which, in turn, causes Apple Co. to stop their contract, which causes the wholesale grower to lose the money he invested in his apple orchard.

This then results in a financial boomerang – the wholesale grower bills Apple Co. for the revenue they lost on the remaining 240 apples (24 months x 10 apples per month) Apple Co. agreed to buy. Apple Co. now has costs they must recoup from Tom.

Energy markets work the same way.

Because energy prices are volatile, when you sign a contract with a supplier, they contract with a wholesaler or generator to “lock” in the price they pay for the energy you are anticipated to use over the life of your contract. This ensures you get the price you want and the supplier makes the profit they need. In the meantime, the wholesaler or generator takes the steps necessary to ensure “your” electricity is available when required.

Whether or not you use the electricity, costs are incurred and typically it’s you, the end user, who pays. Sure, you might save $0.01/kWh by canceling your contract, but you may pay thousands or even tens of thousands of dollars for the “savings.”

Think before you act (and get a new ABC!).

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