Comparing Electricity Plans

Understanding Electricity Plan Types: Fixed, Variable, and Indexed

Choosing the electricity plan type is just one of many choices you’ll have when choosing your new electricity plan. It can be confusing to sort through the different options available, especially if you’ve never bought an electricity plan before. Take a breath, because finding the perfect plan rate type for your family or small business is a lot easier than it looks.

There are three main options for plan types:

Three Types Of Electricity Plans

1. Fixed Electricity Rates Promise No Surprises

Fixed-rate electricity plans are a popular option with electricity customers, mainly because these type of plans can be counted on to always offer electricity at the same rate no matter what happens in the market. When prices rise for other electricity customers, a fixed-rate electricity plan doesn’t budge. The price remains stable throughout the length of the contract.

On the flip side, fixed-rate electricity plans can also cost you a lot of money if you have entered into a long-term contract and electricity prices suddenly go down. Some long-term contracts can commit you for as long as three to five years. Breaking the contract on one of these to get into something cheaper may eat up what you’ve saved, as a few hundred dollars is not an unheard of cost for early termination. Another option for fixed-rate stability without the long-term commitment is a short-term fixed rate contract for three, six, or nine months.

Even so, fixed electricity rates are excellent for anyone who needs a stable electricity rate because of their budget or simply for the comfort of knowing there won’t be surprises. If you’re going to choose a fixed-rate product, the best time to lock in is early-spring after the peak winter demand and before the peak summer demand. The price of electricity is closely tied to the resources used to produce it (usually natural gas or coal). If the price of natural gas goes up, the price of electricity follows and vice versa.

2. Variable Electricity Rates Keep Options Open

Variable-rate electricity plans change in cost from month to month, based largely on the cost of wholesale electricity. This is a great option if you’re not ready to commit to a long-term plan or if fixed-rate plans are especially expensive at the moment. Since most variable-rate plans are month to month, there won’t be a cancellation fee, so you can jump ship whenever you choose.

On the downside, variable-rate plans offer absolutely no protections from fluctuations in the cost of electricity. This means you’ll want to carefully research this option. Most suppliers show the historical pricing of their variable-rate plans somewhere on their website. Beware of variable-rate plans in August, especially in the south. These plans have been known to increase 50% or more for this one month.

Variable rate electricity plans are perfect if you’re in temporary housing or are trying to move into a cheaper fixed-rate plan as soon as possible and are simply using it as a stopgap measure. However, the price fluctuation can make these dangerous for customers who can’t absorb a large, sudden increase in electricity costs.

3. Indexed Electricity Rates Tied To Available Public Indexes Or Time Of Use

An indexed electricity rate simply means that the price of your electricity is tied to another underlying variable. For some electricity providers, this underlying variable is the price of a publicly available index like the monthly closing price of the NYMEX natural gas futures contract. The underlying variable that your electricity provider uses to calculate your bill is required to be fully disclosed in the contract that you sign with your provider. The electricity rates for indexed electricity plans can vary month to month like variable-rate plans or the indexed rate may be fixed for the length of your contract based on the closing price of a certain index on a certain date. Either way, the method of how your electricity rate is determined will be disclosed in your electricity contract. Customers who are interested in paying close attention to electricity rates and the associated price indexes may want to consider an indexed electricity plan.

Electricity suppliers also label time of use plans as indexed because the price of electricity is tied to the time that you use it. The free nights and weekends type of plans are considered indexed because you get free electricity at certain times as defined by the contract that you sign with your electricity provider. These type of plans also require a smart meter so that your electricity provider can accurately measure the amount of electricity that you use during your “free” time. If you are willing and able to shift a large portion of your electricity usage to the measured free period, this type of plan might save your money.

Indexed plans are interesting but can be challenging because they require a fair amount of monitoring on the customer’s part in order to ensure any savings. Take a chance on these plans if you’re looking for a deal that you don’t mind policing yourself.

Choosing the Best Electricity Rate Type

There is no perfect electricity rate type for everyone.

If you’re not sure what type to choose, a variable-rate plan on a month to month contract is probably your best bet unless it’s August and you live in Texas. This gives you time to decide if you like the provider you’re working with and to watch rates to figure out when the best time is to leap into a longer term fixed-rate plan.

If you aren’t the type who likes to gamble or you’d prefer to just buy a plan and forget it, the fixed-rate plans are perfect for you. There’s a lot of security with them, you know exactly how much you’ll pay and, ultimately, the trouble you save by not monitoring prices frequently will probably more than make up for any potential additional electricity costs.