Fixed vs. Variable: Understanding Electricity Rates

  • Published on July 14th, 2013 by

This post was sponsored by albertaenergyproviders.com. I thought it would be a useful article for some readers — I hope it is! And it helps us to do what we do here on Solar Love — bring you top-quality solar news, analysis, and commentary.

Photo credit: Theophilus Photography / Foter / CC BY-NC-ND
Credit: Theophilus Photography / CC BY-NC-ND

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

Price Protection

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.

Flexible Terms

If you’re wary of signing up for longer terms, you can choose a term of 12 months or less.

Fixed Rate Cons

Higher Rates

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.

Exit Fees

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.

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is the director of CleanTechnica, the most popular cleantech-focused website in the world, and Planetsave, a world-leading green and science news site. He has been covering green news of various sorts since 2008, and he has been especially focused on solar energy, electric vehicles, and wind energy since 2009. Aside from his work on CleanTechnica and Planetsave, he's the founder and director of Solar Love, EV Obsession, and Bikocity. To connect with Zach on some of your favorite social networks, go to ZacharyShahan.com and click on the relevant buttons.