Energy

3 Reasons Why Electricity Price Guarantees Are Actually More Expensive

By

Niklas Hirmke & Karl Villanueva

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Mins read

Price Guarantee (Preisgarantie), even the term itself sounds reassuring. It’s one of those things that sound great in theory. As you’ll learn, it has become a way for traditional energy providers to keep their margins – literally at their customers’ expense. We should start thinking more of them as price lock-ins!

As consumers, we often think that we are saving money with a price guarantee. Nevertheless, we have to ask ourselves — why are these dinosaur energy companies and municipal utilities (Stadtwerke) so eager to give one? Why do gas stations not offer a price guarantee, when fuel prices change just as much as electricity prices?

The truth is, traditional energy companies love to give a Preisgarantie because it guarantees their profits. They have an army of analysts who buy electricity on average way below the price they set for your price guarantee. This is just one reason, why a Preisgarantie is a good thing for energy companies and municipal utilities, but not for the customers. We will explain in detail, why customers are better off without a price guarantee.

1. Price Reductions Do Not Get Passed Back To Customers

Price guarantees make us think that electricity prices are constant. But actually they change every minute, and every hour. This arbitrage, this margin is how traditional energy companies make money from your price guarantee.

As energy prices go up and down all the time, consumers are accustomed to checking for the price of gas or diesel when they refuel. When prices go up, the price of gas goes up. But when they go down, we also expect the price to go back down. In contrast, traditional energy providers try to keep prices fixed over the period of the contract. Therefore, customers don’t experience the benefits if prices drop, as those decreases don’t get passed along.

The Ostrom Way = Electricity At Cost

Ostrom passes electricity at cost, just a 6 € flat fee. We do not make more if you use electricity. That makes us one of the only energy providers whose incentive is for you to use less energy!

Illustrating with Actual Energy Price & Competitor Tariff Data

  1. The graph shows the hourly energy prices for the year in our office’s location at 10405 Berlin.The average price per kWh so far this year is 37.15 ct/kWh.
  2. This means that if your price guarantee is above 37.15 ct/kWh, traditional energy companies make way more margin as they are able to buy electricity cheaper than what they are selling it to you.
  3. Prices go up and down, but at 37.15 ct/kWh is where energy at cost happens for Jan-Jun 2022.
Click the image above for interactive version.

How Our Competitors Tried To Lock-In Customers at Way Higher Prices

Now you can see below how much our competitors were offering as a “price guarantee” on December 31, 2021. Per kilowatt-hour prices were being set from 43.58 to an eye-watering 70.04 cents!

Moreover, these all had 12-24 month price lock-ins. Hence, compared to our 37.15 ct/kWh average for the year, you would have been overpaying 17% to 88% more for your electricity had you chosen one of these tariffs at the start of the year.

Competitors were very happy to lock customers in with way above average prices, with advertising that peddles fear of even higher prices.

In contrast, Ostrom was priced at 38.27 ct/kWh at this time, and we reduced our prices 2x as prices lowered.

Ostrom at the same time still delivering energy at cost.

2. Long Lock-in Periods Means You Overpay Longer

Energy contracts with price guarantees usually get offered between 12 and 24 months. While that might sound promising at first glance, customers get locked in for the duration of the contract. As a result of that, cancelling before the end of the duration is very difficult. Customers are not able to switch to a cheaper provider, but have to wait until their contract has expired.

Moreover, until this March 2022, it was a common tactic of traditional energy suppliers to have a cancellation period. When users forget, they would be renewed for another long contract.

The Ostrom Way = Full Flexibility

Ostrom only has one tariff with no minimum contract period (Mindesvertragslaufzeit). That means you will always pay for only the energy that you use!

3. Hidden fees traditional energy providers don’t tell you

It’s not well known but there are actually different kinds of price guarantees. Don’t worry – we won’t bore you with all of them. What customers should know, is that a price guarantee never applies to all components of the energy bill.

The most common price guarantee, a so-called “limited price guarantee”, only covers about 48 % of all cost components. Therefore, more than 50 % of the components can be adjusted. Of course, those adjustments can also lead to price increases. That’s the main reason, that at the end of the contract period, this leads to an expensive and unexpected back payment (Nachzahlung).

The Ostrom Way = Transparent and Digital

With our transparent tariff and our app, we make it as easy as possible for you to track price changes and your consumption. That way you always know where you stand and never have year-end bill shock!

Spot Sourcing vs. Futures – what is the cheaper way?

We at Ostrom buy energy from renewable sources on the energy exchange, on the so-called “spot market”. Without getting into too much detail here, participants can buy short-term deliverable energy on the spot market. Most of the energy companies and municipal utilities are not operating that way. They buy so-called “futures”, which are long-running energy contracts, that have a fixed price for a set delivery period.

Click the image above for  interactive version.

But as a matter of fact, buying on the spot pricing is 14% cheaper in the last 8 years compared to futures.

This is why Ostrom pioneered a no-markup model for energy. While traditional energy companies want to perpetuate the image that futures and a price guarantee are cheaper, the facts show that even with spikes, consumers are better off with a flexible pricing model!

Conclusion: A transparent and flexible model is better for your wallet and for the environment

Do not get fooled into price guarantees by traditional energy companies and municipal utilities. Look for a transparent energy provider, that clearly states how the price is composed.

This is why Ostrom is one of the only providers that turn the energy industry on its head!

  1. We actually pass price reductions back to our customers 🤯
  2. We make it as easy for you to sign up or cancel anytime 📅
  3. We don’t hide anything — we want you to see how much you use ⚡

So if you want to get better, smarter and greener energy, switch to Ostrom today!

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