| Gambling with Short-Term Electricity Rates? Consider Renewables for a Long-Term Investment |
 |
 |
 |
| Written by Admin | |
| Saturday, 15 November 2008 16:20 | |
|
Hedging against risk sounds like an advanced financial management term but it has quickly become part of our every day life, predominantly in energy.  Many utility companies offer short-term, fixed-rate electricity plans to protect us against rising home energy costs.  With energy prices taking big jumps in recent years, we've all learned to appreciate opportunities to protect ourselves against rising costs. However, the current economic recession has also introduced us to the dangers of short-term hedges. Many consumers locked-in rates for electricty or gas that were a good deal in 2007 but could exceed market rates in 2008 and 2009 if the price of energy inputs like natural gas continue their decline. In securing these hedge positions, we place bets that we know where energy prices will go over the next few years. It is a gamble just like playing the stock market in the short-term. The mantra of consumer investing is "think long-term". The financial world has come to understand that the stock market is uncertain in the short-term but is fairly reliable in the long-term. This analogy may also be suited for energy markets. These 6-month, 1-year or 2-year fixed-rate plans offered by utilities are basically like gambling in the energy market. No one can predict where energy costs will go in that time. On the other hand, growing world population and economic development in countries like China, India and others can reasonably be expected to increase demand for energy and subsequently increase the cost of energy over the long-term. If it doesn't make sense to play the stock market in the short-term, then why has it become so popular to play energy markets in the short-term? The problem is, that's the only option offered by utility companies to hedge against rising energy costs. No energy provider in their right mind would offer long-term fixed-rate contracts. Does that mean consumers are stuck paying ever increasing costs for energy? Not at all.  Investing in a renewable energy system is one way to make a sound, long-term hedge against rising energy costs. Solar panels, wind turbines, solar hot water heaters and geothermal energy systems can be purchased by homeowners and either produce electricity or reduce a consumer's energy consumption for 25 + years.  While plenty of utility companies offer these short-term fixed-rate contracts for residential energy, small renewable energy systems can provide consumers with long-term fixed-cost energy to hedge against rising energy rates.
|