3 reasons why electricity price guarantees can end up costing you more
Electricity companies in Germany often lure in customers with price guarantees - tariffs that remain fixed regardless of price fluctuations. But as Niklas Hirmke from Ostrom explains, price guarantees often actually end up more expensive for you, the customer. Here’s why.
The concept of a price guarantee (Preisgarantie) sounds reassuring - in theory. As you’ll soon discover, however, it has become a way for traditional energy providers to keep their margins - literally at their customers’ expense. You should start thinking of them more 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 energy companies and municipal utilities so eager to offer them? 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. Let’s explore in more detail why customers are better off without a price guarantee.
1. Your tariff won’t go down, even if electricity prices do
A price guarantee makes it seem like electricity prices are constant, when in actual fact they change every day, every hour, even every minute. 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 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 we pay at the pump 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.
To put this into perspective, let’s look at the hourly energy prices for Ostrom’s office in 10405 Berlin:
- The average price per kWh so far this year has been 37,15 cents.
- Last year price guarantees were being offered by energy companies at between 43,58 to 70,04 cents per kWh
- This means that if your price guarantee is fixed at more than 37,15 cents / kWh, your energy company is making a big margin, as they are able to buy electricity at a lower price than they are charging you.
You can see how your Preisgarantie compares using the chart below:
See how your price guarantee compares with the interactive chart.
2. Price guarantees lock you into overpaying for a long time
Energy company contracts aren’t usually very flexible in Germany - and neither are their price guarantees. Usually, you are locked into paying that rate for the duration of your contract, typically 12 to 24 months. Cancelling before your contract is up is difficult, meaning you’ll often have to wait a long time before you can switch to a cheaper provider.
Moreover, until March 2022, it was a common tactic of traditional energy suppliers to have an auto-renewal clause in their contracts. When users forgot to cancel in time, they would be renewed for another long contract, locked into overpaying for another year or two years.
3. Price guarantees don’t cover all of the hidden fees
Did you know that there are actually lots of different types of price guarantees? Not many people do. Don’t worry - we won’t bore you with all of them. But what you as a customer should know is that a price guarantee never applies to all of the components of your energy bill.
The most common price guarantee, a so-called “limited price guarantee”, only covers about 48 percent of all the cost components. Therefore, more than 50 percent 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 you are sometimes landed with an expensive and unexpected back payment (Nachzahlung).
There is a different way. Ostrom provides electricity at cost price, with just one tariff plus a 6-euro flat rate fee - and no minimum contract period - meaning you are never locked in, and only pay for the energy you use. The Ostrom app lets you track prices and your consumption, so you never get an end-of-year bill shock. Learn more about why Ostrom avoids price guarantees, or switch your electricity provider.