What is Rate Jumping?

We’re in the electricity industry, and we know how confusing it all is. We are regularly reminded of how much there is to know, and we’re learning new things all the time. We’ve been discussing this topic of “rate jumping” for a while now to try and get a feel for every aspect of it, and we think it is time to share.

In general, most customers don’t know much of anything the electricity industry. They know they need electricity, and they know they have to pay for it. They also know that their bill will fluctuate based on what time of year it is, how energy efficient their home is, and how much electricity they use. But some savvy customers take it to the other extreme, and try and use their knowledge about how the electricity retail industry works to get the same thing the rest of us are getting for a drastically reduced price. How are they doing this? By investing a little time each month hunting down the best variable rate plan available and switching providers.

“Rate jumping” is the concept of signing up for a month to month electricity plan, taking advantage of low intro rates for the first month, and then switching to a different plan or provider each month to get another low intro rate. The process can be a little tedious, but for some people, the time spent is worth the money saved.

There are two types of rate plans you’ll see that don’t lock you into a contract- variable rate plans and prepaid rate plans. However, prepaid rates tend to be significantly more expensive than the intro rates offered by variable rate plans, and tend to more closely mirror the average rate paid by most residential customers. Using data from the U.S. Energy Information Administration, the average residential customer paid a rate of 11.7 cents per kilowatt hour (kWh) in 2011. Typical rates for variable price plans could be something like 6-8 cents per kWh. So why are the rates for variable rate plans so much cheaper?

Variable rate plans are typically not a good choice for most consumers. The introductory rates are good, but that is all they are- intro rates. After a month or two, rates will change without much warning, and while decreases can be nice, the increases can be brutal. Variable rates can be changed by the provider at will. There are many examples of customers who see their electricity bills double or triple literally a month after they sign up. Why would anyone want that?

Well… same reason you might say, “Sure, why not?” when the cable company offers you a free DVR for three whole months when you sign up. You tell yourself you’ll return it before that time is up- yet somehow, 6 months later, it is still in your living room and suddenly you realize they’ve been charging you an additional $25 for the last three months. Many people sign up for the great intro rates that come with variable rate plans during the spring or fall, telling themselves they’ll switch to a fixed rate plan before the weather heats up or gets really cold. But they put it off or forget about it, and instead the provider uses these customers as a cushion to help them recover their losses when energy market prices spike due to heat waves or particularly cold weather. It’s not malicious- it’s just the price you pay for a no-commitment plan with good up front prices (a little more questionable is the practice that many providers employ of quietly switching you to a variable rate plan from a fixed rate plan once your contract period expires, if you don’t call to cancel or renew).

However, what if you’re not the kind of person that puts off or forgets about things? What if you’re the kind of person that pays your bills on the same day every month, without fail? What if you’re the kind of person who spends an hour or more every month clipping coupons to cut down your spending? There are more than a few people out there who have time, but not much money. Many of these people would happily spend an hour or two a month cancelling an electricity plan and signing up for a new one in order to cut down their electricity bill by $50 or maybe even $100 per month.

The idea of rate jumping isn’t cut and dried. There are many things to consider, such as whether or not you have good enough credit to sign up with a new provider with no deposit. Even if you do sign up with good credit, many providers do a hard credit check with new customers- so switching too many times could damage your credit. But what if you alternated between two or three providers? Because many people find this concept so intriguing, we are going to continue to explore this idea- expect a follow up post in the near future.