Fixed-Rate Electricity: Comparing Variable and Fixed Plans
In a world of fluctuating consumer prices, including energy rates, you’ve probably wondered why your electricity bill is so high. If you’re on the hunt for lower rates, it’s important to understand which type of energy plan is best for you.
From fixed to variable rates, energy plans can be confusing. Our comparison guide covers the differences between fixed and variable energy plans, which can help you learn about the ins and outs of the two energy rates, their benefits, and how to determine the best plan for your needs.
What Is Fixed-Rate Electricity?
With fixed-rate electricity, your energy supply rates stay the same for the length of your plan’s contract. Fixed-rate plans help protect users from rate fluctuations during high-demand periods. These contracts usually last between 12 and 36 months, but they can be terminated early if needed.
Fixed-rate electricity is different from budget billing when you pay a flat electricity rate each month instead of your actual monthly costs. It’s possible to hold a fixed-rate contract while also being on a budget billing plan, but you will be required to pay a specific amount every billing period—even if your electric company plans to debit or credit your account for the energy you used.
If you have a fixed-rate contract, you only pay for the electricity you use each month. For example, if your fixed rate is 15 cents per kWh and you use 1,000 kWh, you will be responsible for paying $150 for the supply portion of your bill.
Benefits of Fixed-Rate Energy
If you opt for a fixed-rate energy plan, you can expect certain benefits, including:
- Price stability: Your rate will remain the same throughout your contract. This leads to monthly price stability, which can reduce bill shock.
- Flexible contract terms: Even if you sign a 12, 24, or 36-month contract, it’s possible to end it at any time—especially if you move out of an electricity company’s ZIP code or geographic area.
Challenges of Fixed-Rate Energy
While the benefits of fixed-rate energy are worthwhile, there are some challenges to consider before signing a fixed-rate contract. These challenges include:
- Locked-in rates: Even if the energy market takes a dip, your rates are locked in and you can’t benefit from potentially lower interest rates.
- Termination fees: Even with flexible contracts, some fixed-rate plans charge early termination fees.
What Is Variable-Rate Electricity?
Variable-rate electricity refers to plans with fluctuating energy rates. With a variable-rate plan, your rate will change monthly depending on the state of the energy market.
These plans do not typically have termination fees, but they are more likely to experience substantially higher rates during peak usage periods. For example, you’ll likely pay higher bills during the summer or winter months if you need to run your AC or heat more frequently during that season.
Benefits of Variable-Rate Energy
If you opt for a variable-rate energy plan, you may experience these perks:
- Savings potential: Rates may decrease with changes in the energy market, which can lead to lower monthly energy bills.
- No termination fees: Variable-rate plans do not typically have termination fees when moving or switching electric suppliers.
Challenges of Variable-Rate Energy
Along with the benefits, variable-rate energy has some challenges to consider, including:
- Price increases: Variable rates depend on the state of the energy market. Peak usage periods can increase rates unexpectedly.
- Unpredictable costs: Changing rates, including decreases, impact your bill. These unpredictable changes lead to cost fluctuations—both negative and positive.
Fixed Rate vs. Variable Rate: Choosing the Best Electricity Plan
There’s no one-size-fits-all energy plan. The best plan for you depends on your energy use and other factors. Before choosing a plan or making a switch, compare the differences between fixed and variable-rate plans.
Fixed-rate plans require a contract and potential termination fees, while variable-rate plans do not. However, the price of a monthly variable plan can fluctuate significantly depending on kWh rates and energy consumption. Fixed-rate plans provide users with stable rates and estimable pricing.
Consider choosing a fixed-rate plan if:
- You want or need to avoid financial risk
- Your weather conditions frequently change
- Your energy usage typically stays the same
However, you may be best suited for a variable-rate plan if:
- You stay up to date on the energy market
- You feel comfortable taking some financial risks
- Your energy usage typically fluctuates year-round
If your financial situation changes, it’s possible to switch between fixed-rate and variable-rate plans at any time—even with termination fees, contracts, and a fluctuating market.
Switching to a Fixed-Rate Plan
If you’re in the market for a new energy plan, you might consider looking into a fixed-rate contract. The best scenarios to think about switching to a fixed-rate electricity plan include:
- Relocation: Whether you’re staying in the same ZIP code or moving across the country, relocation is an excellent opportunity to switch energy plans.
- Contract renewals: If you’re up for a contract renewal, think about switching your current energy plan to a fixed-rate contract.
- Contract expiration: If your contract is set to expire or already has, your energy plan options are open. This is a great time to reassess your situation and contract choices.
Fixed-Rate Plan Alternatives
If a fixed-rate plan isn’t the right choice for you, don’t worry. There are a variety of other energy plan options available, including variable-rate plans and these other alternatives:
- Prepaid plans: Great for individuals looking to skip a deposit or credit check, this plan alternative requires users to pay their energy bill upfront and replenish their account balances when they run low. These typically are only available in Texas.
- Month-to-month plans: Ideal for those who travel frequently or need service for short periods of time, month-to-month plans provide users with energy without signing a contract or agreeing to a fixed rate. These typically are also only available in Texas.
- Green energy plans: These plans can help users lower their carbon footprint by providing electricity from renewable resources, including solar, wind, and hydroelectric power.
Fixed-Rate Electricity FAQ
Find answers to popular fixed-rate electricity questions below.
Are Fixed or Variable Electricity Plans Better?
Whether fixed or variable electricity is better can only be determined on a case-by-case basis. Individuals with unique needs may experience greater benefits from one over the other, like predictable fixed-rate power bills or flexible variable-rate plans.
Are Fixed-Rate Energy Plans the Cheapest?
Fixed-rate energy plans can be the cheapest, but it’s possible for variable-rate plans to cost less. Depending on the energy market in your utility territory, you may end up paying more on a fixed-rate plan during market declines. However, fixed-rate plans may be cheaper in the long run if interest rates and kWh costs increase.
How Many kWh Per Day Is Normal?
According to the U.S. Energy Information Administration, residential utility customers use an average of 29 kWh per day or 886 kWh per month.
How Much Does Fixed-Rate Electricity Cost?
The cost of fixed-rate electricity varies depending on your location. It’s possible to find electricity plans with fixed rates from 7 to 20+ cents per kWh.
Save Money on Electricity With Arbor
Even if you understand the differences between variable and fixed-rate electricity, finding the optimal rate plan can be difficult. At Arbor, we do the hard part for you. We work to find you the optimal electricity plans based on your preferences at no service charge. Enter your ZIP code to find out if you're eligible to switch plans and save money on your electric bill today.