Energy price lock-ins

Trieu, a loyal MR reader, asks:

I’ve recently received "lock-in" offers from my gas and electricity company.  They’re offering me the "opportunity" to commit to the current price of gas and electricity for two years, instead of paying the fluctuating month-to-month rates.  Naturally, this offers set off my scam alert.  Are the energy companies signaling that they think energy prices are too high and will go down?  Or do you think there could be something else behind the strategy?

If you draw a standard and supply diagram, you can see that fluctuating prices (with a constant mean) increase expected consumer surplus but decrease expected producer surplus.  For instance as a buyer you’d rather have a price of 50 half of the time and a price of 200 the other half of the time, rather than 125 all the time; the opposite is true for the seller.  That is one reason why the utility may prefer a lock-in.

There is also a "only the stupidest consumers will respond" effect.  It costs the utility very little to make an offer favorable to themselves but unfavorable to the consumers.  It’s worth doing even if only a few people accept.  Given that utilities are regulated monopolies, you should expect conflict of interest to be high and thus decline most of their offers.

The most general response is simply that you should insure only against catastrophic events, and yes that sometimes includes your wife getting mad because you didn’t buy a product warranty on your latest purchase of toothpicks.


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