What are fixed price options Who offers them

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Fixed Price Purchase Option

What is a Fixed Price Purchase Option

A fixed price purchase option is the right, but not the obligation, to buy a leased item at the end of a lease term at a price determined from the onset of the lease agreement.

BREAKING DOWN Fixed Price Purchase Option

A fixed price purchase option’s purchase price is established when the lease terms are agreed upon. The lease agreement should also describe when the option can be exercised. This agreement usually sets the timing to occur at the end of the scheduled lease term. These terms typically range between 12 and 60 months.

Various types of property come with a fixed price purchase option, but such options apply most commonly to the leasing and purchase of real estate, heavy equipment, or automobiles. A common variation on this arrangement is the sort of lease option offered by mobile phone companies which allow customers to lease certain phones for a period of time, and at the lease term end, either trade in the phone for a new one, or pay the total value of the phone, which is set at a fixed price at the beginning of the lease term.

The advantage of the fixed price purchase option for the lessee is that the lessee knows with certainty what the cost to purchase the property will be.

Comparing Fixed Price Purchase Option to Fair Market Value Purchase Option

In contrast to a fixed price purchase option, a fair market value purchase option gives the consumer the option to purchase the leased item at the end of the lease term at a price based on the item’s fair market value at the time of the lease’s expiration.

The main drawback of the fair market value purchase option is that the consumer will not know in advance how much the purchase price will be. However, while the fair market value purchase option does not offer the purchase price in advance, as long as the assessed fair market value is accurate, the buyer need not worry that they will overpay for the property and, similarly, the lessor need not worry that they will receive less than the item’s actual value.

When given the choice between these buying options, a consumer will do well to consider the type of property itself. A fair market value option, for instance, is a good choice for companies leasing equipment such as security systems; servers, computers, and other IT needs; and other technology-based equipment. Technology changes at such a high speed that consumers want to avoid equipment that will become obsolete in a few years. Consumers buying equipment with longer life cycles, on the other hand, may choose the fixed price option, though they may end up with a higher monthly lease payment.

The Advantages and Disadvantages of Fixed Pricing and Dynamic Pricing

Fixed pricing is a strategy in which a price point is established and maintained for an extended period of time. Dynamic pricing means the price on a product or service can change over time. Selecting the appropriate strategy for your business has major implications in your ongoing effort to attract customers and achieve optimal profit margins.

Fixed Pricing Advantages

Fixed pricing is intended to attract more customers and clients because it offers them assurances. On project work, for instance, a fixed price for the entirety of the job allows the prospective client to know how much he will pay prior to agreement. Fixed pricing is also consistent, so customers get used to your pricing and you have less risk of offending them by fluctuating prices over time. Sales forecasting and profit estimates are also simpler when you know your price point.

Fixed Pricing Disadvantages

The risk with fixed pricing is that it doesn’t allow for adjustments if you get into product or service delivery and realize your cost basis is higher than expected. The customer pays the established price regardless of changes in your time or costs. This may mean you undercharge a customer due to a lot of additional work hours beyond those estimated in the price quote. Fixed pricing also doesn’t allow for adjustments over time to sell off extra inventory or available seats for entertainment and other types of events.

Dynamic Pricing Advantages

Dynamic pricing often is referred to as discriminatory pricing because it allows you to maximize profits with each customer. This approach is common in event promotions: If initial demand is low, facility or event managers work to sell off open seats to generate whatever revenue is possible. Another strength of dynamic pricing is the ability to adjust prices for service projects or products based on the time and costs involved or fluctuating demand. Seafood distributors and restaurants, for instance, often vary prices depending on season and inventory supply.

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Dynamic Pricing Disadvantages

Dynamic pricing can lead to customer alienation. If customers realize they paid higher prices than others for the same solution, they may demand their money back or spread negative messages in the marketplace. This approach also may turn off customers who prefer to know the set price up front on a purchase. Another challenge for companies that use dynamic pricing is the need for advanced technology programs to optimize price adjustments over time. Regular users in entertainment and hospitality often have very intricate software solutions programmed to adjust prices in real time based on demand.

Is Fixed Price Energy A Good Deal?

Each month, the energy bill hits your mailbox. There’s not much thought into writing the check for payment, aside from the seasonal changes. Waiting for summer to end and energy bills to drop.

The last few years, most energy companies have started sending out options that haven’t existed in their history. Giving you the option to smooth out your monthly bills and the confusing option to “fix your energy rates” for three or five years.

That has confused many consumers on whether these fixed payment plans are a good deal.

Of course they sound good, but what’s really behind them? Should you consider moving to a fixed price contract?

Always skeptical of the large corporations trying to pass through hidden fees, we decided to ask an expert, Jim Schmelzer. Jim has years of experience making risk models for energy companies and trading the electrical grid.

If it’s confusing to you, maybe Jim can shed some light on it for you.

Before we proceed, let’s analyze these “fixed pricing” options.

What is a Fixed Price Energy Contract?

A fixed-price energy contract is when a power company offers consumers a fixed rate that is guaranteed for the term of the contract.

Typically, the fixed rate is slightly above what customers are currently paying on traditional variable rate energy plans.

The idea behind these contracts is that consumers are able to “lock in” a set price per kilowatt hour for a term that is typically 2 – 3 years (although some companies are now offering 7 year contract terms).

These offers have become popular as a result of a deregulated utility marketplace. New companies are popping up and offering these services at rates that may or may not be lower than what is available from the traditional utility provider in your area.

This chart is an example of how deregulation works:

To gain a better understanding of exactly how these contracts function, let’s take a look at an offering from FirstEnergy Solutions (FES); an Ohio company.

An unregulated subsidiary of FirstEnergy Corp., FES is offering a 7 year contract to over 600,000 households in Northeast Ohio. The company is also working to expand this deal by offering it to thousands of other households throughout the state.

The fixed-price offer means that consumers who “opt in” are guaranteed to receive electricity for 6.75 cents per kilowatt hour for the next seven years.

Keep in mind that a 7 year contract is a very long term in comparison to the 2 – 3 year offerings of most other US power companies.

Although the average variable electricity rate in these areas fluctuates between 6.2 – 6.3 cents per kilowatt hour, it demonstrates that the fixed-price contract currently offers customers a higher rate than they would otherwise pay if they choose not to contract with FES.

Basically, consumers are betting that electricity prices will increase during the seven-year term and that they will recoup the initial higher cost in the latter years of the contract.

FES on the other hand, is treating the energy market the same way Southwest gained a low-price competitive advantage in air travel for almost a decade. Southwest used options to lock in a low price on jet fuel for years in advance. As the price of oil and fuel increased, Southwest held a competitive advantage.

FES will buy options on the electrical grid and trade them to keep the delivery cost as low as possible. But since they know exactly how many consumers signed up, they have a relatively predictable demand that they can lock in at a fixed price through these same options.

So it’s a calculated gamble on their part. Those calculations are what our expert and friend, Jim Schmelzer specializes in.

In the end…is it good for you?

Is It Worth It?

The prices we pay as consumers are directly affected by wholesale energy prices that are traded by companies like Jim’s or FES on open markets around the country and the world.

But just because energy companies may get lower wholesale prices doesn’t necessarily mean the savings are passed on to consumers. Infrastructure improvements, for example, can quickly eat away at lower cost energy procurement.

As you can see from this chart, energy prices for consumers continue to rise.

Now that we better understand exactly what a fixed-price energy contract is, are we in a better position to determine if they are worth it?

First, we should point out that these contracts have cancellation fees that are applied if a customer chooses to leave the contract early. So let’s say you choose to opt in to fixed-price energy only to find out that the price drops significantly two years into the contract.

With cancellation fees that can be as much as $300, it may not be worthwhile to cancel as the termination fees may negate any potential cost savings.

If you’re not willing to stick to it, you might as well not bother.

Check out this offer from a New Jersey power provider. Anytime an energy company starts pedaling Target gift cards, it is a little concerning about whether it is in your best interest.

Are they profiting from this deal or are you?

After the research, however, you should take the fixed price offer.

Here are three big reasons why.

Reason #1 – The aging infrastructure

Many power companies have to invest heavily in new infrastructure. Existing infrastructure is open to new technology attacks and has significant power waste between the production facility and your home.

Upgrades to the existing infrastructure have proven to be patchwork. Energy companies have automated many of the control centers, but that has led to more serious issues.

Two researchers were easily able to locate 7200 devices that controlled the flow of energy, which creates plenty of opportunity for hackers to hijack a system and cause disruption. Over 40% of cyber attacks targeted energy and pipeline infrastructures around the world.

As you saw in the wholesale chart, energy companies are continuing to pass these costs to improve the grid onto consumers.

Don’t expect any price breaks from them soon.

Reason #2 – The fuel sources

Right now, wholesale prices remain low for a few reasons. Cheap coal is still being pushed through the system and the extraction of some huge reserves of the cheapest Liquid Natural Gas (LNG) right here in the U.S.

But Jim Schmelzer told us both of those will change in the next 5 years.

Coal, which accounts for 1/3 of our electrical generation, can’t be relied on after 2020. The EPA’s Mercury and Air Toxics Standards (MATS) is moving much of that cheap coal offline in 2020. 93% of factories don’t have the processes in place to clean the air to meet EPA standards. Just have a look at the capacity that will be pulled offline in the next 3 years.

That won’t be good for prices.

The abundance of LNG will continue. Reserves are huge, but there’s one factor that will cause prices to increase.

The Department of Energy, which had previously only approved one export facility from 2020 to 2020, has approved two new facilities since May 2020. There are more to come as big demand for our cheap natural gas is coming from China, India and South America.

When exports go up, the price will follow.

Reason #3 – It’s now up to you

We seek resilient solutions to make sure we can interact with the world from a position of power if something were to happen.

Removing a variable allows us to do that.

If you fix the price of your power, you will now have incentive to conserve and find alternative power sources like solar. We have a report that gives you important information about power generation for your home. You can find more on it here.

Resiliency demands that we move away from public utilities whenever possible. It only makes sense to invest in a dependable energy solution that will save us money in the future.

Long-term sustainability does not come from any utility company.

Instead, it will come from our own ingenuity and willingness to invest in new, renewable energy technology.

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