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Fixed vs Variable Rate Electricity Plans: Which is Best?
5 minute read • Graham Lumley • Last update April 2024
Variable vs fixed rate electricity: which is better?
Fixed rate electricity plans are a better option for the majority of homeowners because with a fixed rate, you are locked into the same energy charge for the duration of your contract—no matter what happens to wholesale electricity prices. You are shielded from price volatility that occurs due to weather, seasonality, renewables, and other contributing factors.
There are a only few specific scenarios where a variable rate can be more affordable, such as if you are going to be living somewhere temporarily (1-2 months) and it happens to be spring or fall when weather is more mild.
By evaluating your energy usage habits, location, and market conditions, and comparing different providers and plans, you can make an informed decision and select the electricity plan that best suits your lifestyle.
Let’s dive into the pros and cons of fixed and variable rates energy plans so you can make the best choice for your wallet, your home, and your family.
What is a fixed rate electricity plan?
Fixed rate electricity plans are plans with a set rate per kWh that does not change for the duration of your contract, regardless of changes to market conditions like weather and demand. With your price per kWh locked in, you have the ability to predict your electricity costs. This allows you to budget with ease and eliminate financial surprises on your monthly bill. This is precisely what fixed rate electricity plans offer. Fixed rate plans are particularly beneficial for those living in extreme climates or anyone who prefers consistent budgeting.
Fixed rate vs flat rate plans
Fixed rate plans should not be confused with flat rate plans. Flat rate plans offer the exact same price (usually a very high base fee) each month for specific ranges of energy use. For example, if you use 0-500 kWh of energy, your bill may be $99. If you consume 501-1000 kWh, your bill may be $159. And if you were to use 1001-2000 kWh, your bill could be $259. While flat rate plans offer even more predictability, you can often be overcharged for power.
With a flat rate plan, it’s your price per kWh that remains the same at different levels of usage, not the final bill. That being said, it’s important to note that with a fixed rate plan, your bill will change month to month based on your usage. They are generally more predictable and manageable than those experienced with variable rate electricity plans. In essence, fixed rate plans provide stability and predictability in a world where energy prices can fluctuate wildly.
Pros of fixed rate plans
Fixed rate plans offer the following benefits:
- Consistent pricing. By locking in a rate per kWh, you are safeguarded from energy market volatility. Even if market prices soar, your electricity rate remains stable, allowing for more effective budgeting and potential savings over the long term.
- Eliminate the need for frequent comparison shopping.
- No need to constantly monitor energy rates and switch plans or suppliers.
- Save time and effort.
- Provide peace of mind.
Fixed rate energy plans are the best option for most people, but not everyone. If you prefer flexibility and the ability to switch plans when energy rates change, a fixed rate plan may not be the best option for you. Nevertheless, for those seeking stability and predictable costs, fixed rate plans are a solid choice.
Cons of fixed rate energy
While fixed rate plans offer stability and predictability, they also come with some drawbacks:
- Inability to take advantage of lower market rates when energy prices drop. If you’re locked into a fixed rate plan, you might miss out on potential savings during periods of low energy prices.
- Some fixed rate plans offer high early termination fees if you decide to end the contract before its completion. This can be a significant consideration for those who may need to move or switch electricity providers before their contract expires.
At BKV Energy, our early termination fee decreases the longer you are a customer – it’s only fair.
What is a variable rate electricity plan?
Variable rate electricity plans are plans with prices per kWh that fluctuate based on market conditions. This means you could potentially save money during periods of low demand or when market prices drop. However, the rate may also increase if market conditions drive energy prices up.
The main factors influencing variable rate electricity plans are current electricity market conditions. This means that with a variable rate plan, you get to ride the waves of the energy market, potentially benefiting from lower prices but also facing the risk of higher costs during price spikes.
In Texas, it’s very likely that market conditions will push prices higher throughout the same due to intense demand and high production costs across the state.
Pros of variable rates
Variable rate plans offer several advantages, including:
- The opportunity to capitalize on lower prices in the energy market. If energy prices drop, you can enjoy the benefits of lower rates without being locked into a higher rate, as is the case with fixed rate plans.
- Typically no cancellation fees. This provides you with the flexibility to switch providers if a better deal becomes available or if your energy needs change.
- Freedom from long-term contracts. This can be particularly appealing to those who prefer not to be tied down.
However, it’s essential to be aware of the potential drawbacks of variable rate plans. While they offer flexibility and the chance to save money during low-demand periods, they also come with the risk of unpredictable costs and potential budgeting challenges due to market fluctuations.
Cons of variable energy rates
The primary disadvantage of variable rate electricity plans include:
- Lack of predictability. Since rates fluctuate in response to market conditions, it can be challenging to accurately predict your monthly electricity bill. This can make budgeting more difficult, especially for those who prefer a stable and consistent monthly expense.
- Potential for higher rates if market prices rise. While variable rate plans offer the opportunity to save money during periods of low demand and falling prices, they also expose you to the risk of increased costs when market prices climb. This unpredictability can be a significant concern for those on a tight budget or with limited tolerance for risk.
Which type of electricity plan is right for you?
Generally, we always recommend Texans sign up for fixed rate plans due to the stability and predictability that comes with those plans. With our very long and hot summers, you are more likely to spend less on energy with a fixed rate plan.
But, ultimately, the choice between fixed and variable rate electricity plans depends on your personal preferences, risk appetite, and energy consumption habits. If you prefer flexibility and the potential for cost savings during low-demand periods, a variable rate plan may be more suitable.
Both fixed or variable rate plans have their pros and cons, and the best option for you will depend on your unique circumstances and priorities. By carefully considering your energy usage habits, location, and market conditions, you can make an informed decision and choose the electricity plan that best meets your needs.
Learn more about other types of electricity plans
- Free Nights and Weekends: Are They Worth It?
- How Bill Credits Lead to Higher Electricity Bills
- What Are Base Charges on Electricity Bills?
- What Are Indexed Electricity Plans?
- Prepaid Electricity Plans: Higher Costs, Higher Risk
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