Fixed vs. Variable: Understanding Electricity Rates
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In most markets, consumers have a choice of either fixed rate or variable rate pricing. While both options will give you some measure of control over your electricity bill, one will offer more control than the other. Read on to find the option that will best suit your needs.
Fixed Rate Electricity Plans
Fixed rate electricity contracts have terms with a minimum of at least 3 months but could extend to as much 36 months. During the course of the contract, the unit price of electricity will stay the same — with a few exceptions.
The contract length, also called the term, for fixed rate electricity may be 3 months, 6 months, 12 months, 24 months, and in rare cases 36 months. If you select a fixed rate contract, you’ll be locked into the contract for the full duration. Early cancellations will results in penalties. So why would a customer choose a fixed rate if it ties them to one supplier?
As it turns out, the benefits make the commitment worth their while.
Fixed Rate Pros
The primary benefit of fixing your electricity rate is the price protection it offers. The uncertainty of energy prices means that the rate could go up at a moment’s notice. If you believe that the price will go up, the obvious solution is to lock in your rate.
Good For Fixed Budgets
Fixed prices also benefit people on a fixed budget. Some people might struggle to pay their bill if the price of electricity goes up. A fixed rate will give them the assurance that the rate will stay the same throughout the duration of the contract.
If you’re wary of signing up for longer terms, you can choose a term of 12 months or less.
Fixed Rate Cons
If the price of electricity falls, you’ll be stuck paying higher rates until the end of the term. Fixed contracts are a gamble. They’ll protect you if the prices go up, but you’ll pay more when the rates decrease.
The provider will impose a penalty if you terminate your contract before the term expires.
Variable Rate Electricity Plans
On a variable rate electricity plan, your rates will fluctuate based on wholesale prices. When the price of energy goes down, you’ll pay less, but your rates will increase if the prices go up.
Variable rate contracts have month-to-month terms, so there are a no fees for terminating the contract.
Variable Rate Pros
Variable rate plans can be cheaper than fixed plans. And since there are no long-term contracts or penalties, you can switch providers any time you want. Consumers are drawn to the cheaper prices, but a package that seems like a deal today may be expensive tomorrow.
Variable Rate Cons
The biggest disadvantage that customers experience with variable rate plans is the possibility that the rates can increase at a moment’s notice. This means that they’ll have to keep a close eye on the rates.
Which Is The Best Option For You?
If you don’t mind monitoring market rates and changing suppliers to get the best deals, then a variable rate plan is the way to go. Otherwise, a fixed rate might be more appropriate.
Author Bio: Jean Linder is an accountant. She frequently writes about confusing billing situations on money blogs. Click this natural gas price comparison site, albertaenergyproviders.com to find out more.