How to Choose An Energy Service Company (ESCO)

The Choose Energy Team
By The Choose Energy Team August 19th, 2014
For business

Update on NY ESCOs 3/1/16

N.Y. Bans Commodity-Only ESCO Service To Mass Market Customers (“Full Stop” To Retail Market With Limited Exceptions). You can read more here at Energy Choice Matters

What Is An ESCO?

ESCO is an abbreviation that’s short for “Energy Service Company”. The most prevalent kind of ESCOs are energy suppliers who buy and sell electricity on the market.

In turn,  they sell that electricity to customers at rates below what the local utility charges. These rates at which they sell at are often called “competitive rates” as the ESCOs compete with each other and the utility to offer customers the best possible energy rates.

How Energy Companies (ESCOs) Differ From Utilities

Energy suppliers are different than the local utility because the utility simply passes through the market electricity rates to the consumers, while energy providers buy and sell electricity to optimize pricing, which in turn lets them offer competitive energy rates to customers.

These companies figure out when they can buy energy in bulk at the best times, and then pass that savings on to customers who choose their energy plans. That enables the suppliers to offer rates below the default utility rate, which helps customers save money.

Utilities, such as ConEd, are regulated and cannot make a profit on the electricity they sell to consumers. Therefore, they don’t implement the best market optimizing purchasing techniques. Instead,  the utilities focus most of their time in making sure the electricity is delivered safely and reliably to your home or business.

Their primary source of income comes from maintaining the poles and wires which distributes the electricity to your home or business.  This shows up on your bill as something along the lines of  “distribution” charge.

Because of this, ESCOs are in a position to optimize their expertise in buying and selling on the energy markets. As a result, ESCOs offer consumers more competitive electricity rates than the default utility rate.

Benefits of Choosing An ESCO

There are 3 main benefits consumers reap when switching to an ESCO plan, first- they can lock in stable, fixed energy rates. Secondly, they can choose from plans that are often cheaper than the default utility rate, which can mean big savings in the long term. Finally, with ESCO plans, they can choose renewable energy plans and help save over 7 metric tons of CO2 per year.

Stable Rates

In certain states, such as New York, the utility rate can vary month by month.  Because the utilities cannot profit on the sale of electricity, they simply offer the market rate, whatever that rate may be.  This can be disadvantageous to consumers.

For example, in New York City, where ConEd is the local utility, pricing varies monthly and over the past year, has ranged from 7.5 c/kWh to over 20 c/kWh. That means consumers could be paying significantly more, or less, for the same electricity- and are subject to unforeseen spikes in the market. One downfall with the market pricing is that markets are also susceptible to weather related risks. For example, in February, electricity rates in New York shot  up to nearly 25 c/kWh, which is 3x the price for the same electricity 4 months prior.

 

Because ESCOs can optimize for buying opportunities in the market, they can offer fixed rate plans which protect customers from pricing surges, such as the ConEd surge in February.

Even factoring in all competitive plans offered on chooseenergy.com, an online energy  comparison platform, ESCOs hedge consumers from market risks and protect them from extraordinary  price surges due to unintended market spikes.

Lower Competitive Rates

Furthermore, ESCOs can offer lower, competitive rates to homes and businesses as a result of their opportunity to optimize market buying opportunities. Beyond buying at the optimal times, these ESCOs can utilize their collective purchasing power to obtain better deals than the utility rate.

If  New York consumers choose the lowest competitive plan, (an ESCO plan) then they would save 9% over the course of a year,  which yields over $70 in extra money, for the same exact electricity.

Here’s a graph showing how the yearly savings compare if someone had switched from the beginning of that month, and how much they would save over the course of a year. The blue bar shows the lowest competitive rates, while the red line shows the higher default utility rate.

Learn More: Should I Change My Electricity Supplier From My Utility?

Opportunity To Choose Alternative Energy Plans

Finally, another benefit of switching to a competitive supplier is that some offer the opportunity to power your home with renewable energy.

This doesn’t mean that you’re purchasing your power from a wind-farm or hydroelectric dam, but rather it means that the ESCO is purchasing RECS (renewable energy certificates) which match a certain percentage, whether 25% or 100%, of your energy usage.

These certificates, which the suppliers purchase, go to investing in renewable energy sources, and putting more renewable energy on the grid.

Some states, like Texas, purchase 44% of their electricity from green plans. Residents who choose renewable plans save, on average, the equivalent of 7.3 metric tons of CO2 per year, by choosing a renewable energy source.

If everyone did that, it would have the approximate collective benefit as removing 400 million cars from the road, or planting 50 billion trees.

Because utilities do not offer renewable energy certificates, or the choice to choose a renewable energy plan, ESCOs can help customers choose renewable energy plans and do more to save our planet.

Is There A Catch Choosing An ESCO Plan?

If an energy plan sounds too good to be true, it probably is. While ESCOs are regulated, consumers must be diligent in selecting an energy plan.

There are two types of plans, fixed rate plans and variable rate plans. Fixed rate plans offer consumers the same price per kilowatt (kWh) as the month prior, while variable rates fluctuate with market rates.

We advocate that most consumers choose a fixed rate, while those commercial customers and energy savvy residents may consider a variable rate.

There are some suppliers who offer deceptive deals, and aggressive sales tactics, which is why we advocate that shopping online first to get a feel for what’s out there, and then switch to a reputable, trustworthy supplier.

Learn More: Selecting An Energy Provider

Concerns of Switching To An ESCO Plan

There’s a few concerns most folks have in switching to an energy plan that is different from the utility- here’s the four most common concerns:

1) My Lights Will Go Off

It’s one of the most common concerns when switching electricity plans, but fear not. The lights won’t go out, and the supply of electricity to your home won’t stop while you switch. The electricity is always flowing through the grid, and will always come to your home or business, as long as you keep paying the bills.

The switching process happens in the “backend billing” part of the utility world, and the supplier will pick up right where your utility left off, without a hitch or blip in service. This “switch officially happens on what’s called a “meter read date” and happens after you’ve switched online.

2) The Utility Will Hold My Switching Against Me

As before, the supplier does not make a profit on selling electricity to you, their main business is delivering that electricity to your home or business. Therefore, there’s no concern that the utility will cut off service to anyone who switches to an ESCO.

3)  I’ll Miss Out on A Good Time To Buy

Buying electricity can be complex, and because energy is a commodity, there are times when energy is “on sale” and times when it’s “over-priced”. By checking out Choose Energy’s Empowerment Reports, we crunch the numbers and show how prices have changed over time, which can help gauge when’s a good time to buy, and which plans are most popular.

Learn More: Now’s The Time To Buy In NYC

4) I’ll Get Scammed By A Shady Supplier

By shopping around online, you can get a good idea of which suppliers are trustworthy and which to avoid. To make it even easier, you can go through a company that diligently screens all suppliers, in order to weed out the deceptive and scam plans.

In Short:

ESCOs are energy service companies that are different than utilities, who buy on the markets and sell that energy to customers who switch to them. They differ from the local energy utility because they optimize to make profits by trading and using their size to get customers the best rates, while utilities focus on delivering the electricity, and do not profit from selling it.

In New York (and other states), residents switch to an ESCO plan for three reasons: 1) they select a stable, fixed rate plan that doesn’t fluctuate on market prices. 2) They have the option to choose lower priced plans, which save on average 9% and over $70 over the course of a year. 3) ESCOs offer renewable plans, where customers can save 7.3 MT in carbon emissions over the year by choosing renewable energy.

Some ESCOs are shady, and consumers must be diligent to avoid selecting a bad deal. By comparing online, you can look at different plans from different, trustworthy providers.

Switching to an ESCO will not put cut off your power, the lights will stay on, and you’ll still receive service from your local utility. Researching prices online can help gauge when’s a good time to buy. To learn more, enter your zip code in the form below.

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