Pre-buy Contracts for Heating Fuels
The Office of Energy and Planning (OEP) receives many inquiries from people who want to know more about pre-buy plans and whether they should pre-buy their Winter heating fuel. In any case, the first step in managing energy costs should be to make energy efficiency improvements; significant savings can be realized. The first item in planning for the next heating season should be to make your house as thermally efficient as possible, and to be certain that your heating system is properly cleaned and tuned up. Proper heating system maintenance could save you up to 20% on heating fuel bills. For more information on lowering your heating bills, go to Lowering Energy Bills.
Here are some answers to frequently-asked questions about pre-buy contracts.
What is a pre-buy contract?
A pre-buy contract is a budget planning tool, not a guaranteed way to save money. It sets a single price for the fuel you will use during the heating season, regardless of price swings. There is no way to know whether prices will rise or fall during the heating season; thus the pre-purchase of fuel can ultimately cost the householder more or less than would have been the case if there were no pre-purchase contract. A pre-buy contract is similar to an automobile insurance policy: When a policy is purchased, there is no guarantee that it will ever pay off; however, the cost of the policy might help avoid a much greater cost in the event of an accident or other loss in the future.
How are dealers able to offer pre-buy contracts?
- The ability of a dealer to offer heating fuel at a set price is based on the fact that the dealer can contract to obtain a specified amount of fuel from a wholesale supplier at a set price during a particular month or months in the coming heating season. The contract is a legally binding agreement. In a sense, the heating fuel dealer is in the same position as the customer: A pre-buy contract assures that the customer must purchase a given amount of fuel at a pre-determined price. The amount of fuel and the price cannot be altered.
- By law, the dealer must provide for the ability to pay for the amount of fuel he or she offers to the customer. The dealer should be able to verify this to the customer’s satisfaction prior to entering into any contract with the dealer.
Can OEP recommend whether a householder should pre-buy?
OEP endorses the concept of pre-buy contracts as budget planning tools. However, OEP cannot recommend what to do in specific cases, because each householder’s circumstances are different. However, here are some things you might think about when making a decision:
a) Do you believe the price of fuel is likely to rise or fall during the heating season?
b) Can you afford to pre-buy all the fuel you expect to need?
If the price of fuel falls below my pre-buy price, will the dealer lower my price?
No. The dealer made a contract with his or her supplier to purchase the fuel at a certain price. Lowering the price to you would cause the dealer to lose money.
What is "Price Cap" or "Downside Protection"?
Fuel dealers may offer a feature in the pre-buy contract that sets a cap on the price a customer will pay per unit of fuel. For example, a customer may have the option of paying some premium, for example 20 cents per gallon, to guarantee that if the daily fuel price falls below the contracted price, the customer will be billed at the lower price. Some dealers may offer this option for a one-time, up-front payment, for example fifty or one hundred dollars, instead of a per-gallon premium. It is not possible to predict whether this option is worth purchasing. However, some variables to consider are:
a.) How many gallons of fuel will be pre-purchased? The more fuel pre-purchased, the smaller the drop in "day" price that would be required to recover a one-time, up-front price cap premium. Examples:
- Customer A pays $100 to obtain a price cap on 1000 gallons of heating oil. To recover the cost of the price protection, the price of oil at time of delivery would need to be on average 10 cents lower than the price cap. Any further price decrease will be money saved.
- Customer B pays $100 to obtain a price cap on 500 gallons of heating oil. To recover the cost of the price protection, the price of oil at the time of delivery would need to be on average 20 cents lower than the price cap. Any further price decrease will be money saved.
b.) How likely is it that the price will fall during the heating season? This assessment is the responsibility of the customer.
How do I know the dealer will actually be able to deliver the fuel, and at the contracted price?
The dealer is free to set prices for "deliverable" fuels. Thus, the contract price is set by the dealer. However, price and other contract details must be honored. And the dealer is required by law to provide surety that the contracted fuel will be available and delivered. The dealer is also free to set other contract conditions, provided - as with any contract - that they comply with all applicable legal requirements. RSA 339:79 helps protect consumers by establishing a set of requirements for contracts offered by heating fuel providers.
Should I change dealers to get a better pre-buy price?
OEP cannot recommend what to do, but it is important to note that price is only one variable to consider in your choice of fuel dealer. Reliable, timely fuel delivery and timely emergency service are two other considerations.
I want to manage my fuel costs but can't afford to pre-buy. What can I do?
Many fuel dealers offer budget payment plans that spread heating costs more evenly over the course of a year. Check with your dealer for details and about other possible payment arrangements.
Other things to look for:
These items may help you decide whether or not to pre-purchase fuel, how much to purchase, and whether it appears worthwhile in your specific case to contract for any price cap option.
- What are the starting and ending dates for the pre-purchase price period?
- How much fuel did you consume last year?
- Was it a typical heating season in terms of fuel demand for your part of the state? Your dealer should be able to provide you with comparison data in terms of "heating degree days" (HDD) compared with the average annual number of HDD over thirty years. More HDD than the average means more heating demand than average.
- How much of your typical heating fuel amount can you afford to pre-purchase?
- What happens to any credit in your account at the end of the heating season if you did not use all the fuel you purchased? Note: The contract must, by law, be very clear on this. A typical provision is for unused credit to be applied to non-heating season fuel purchased at the current (not pre-purchase) price. In any case, it is worth reading any contract very carefully prior to signing, in order to understand clearly what you and the fuel dealer are agreeing – and not agreeing - to do.