Are Variable Energy Rates Right for You?

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6 minutes read

Category: Home Utilities
Posted on: 04/02/2021
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Consumers in states where electricity and gas utilities are deregulated often face a seemingly-overwhelming number of options to choose from when shopping for a new energy plan. One of the most significant decisions is choosing between fixed or variable energy rates. While fixed-rate plans lock in your price for anywhere from six months to three years, variable-rate plans offer more flexibility.

Finding the right energy plan can be challenging; whether a variable-rate energy plan is right for you depends on your situation. With a variable-rate plan, you're taking a risk. You're betting on falling energy rates or at least on average rates that are below the cheapest available fixed-rate plan.

What is a Variable-Rate Energy Plan?

Variable-rate energy plans are electricity or natural gas plans with frequently changing rates. The price you pay for a kilowatt-hour (kWh) of electricity or for a therm of gas is subject to change periodically, based on wholesale energy market prices.

The rates you actually pay on your residential utility bill do not change every day. While energy suppliers buy the energy at a volatile wholesale rate, they give variable-rate customers some stability. Variable rates for residential and small business customers typically change once a month or after a complete billing cycle.

Benefits and Drawbacks of Variable Energy Rates

With a variable-rate electricity or gas plan, you can benefit from low energy prices on the wholesale market. When you're shopping for a new electric or gas plan at a time when energy market prices are falling, a variable-rate plan will save you money as compared to a fixed-rate plan. With a fixed-rate plan, you'd be in a contract with the supplier at a higher rate. The biggest benefit of a variable-rate plan is that you are not in a contract. You can typically cancel your plan at any time.

Being able to switch your provider also means that you can take advantage of other offers that may be attractive to you. Many retail providers offer incentives not only for long-term fixed-rate plans but also for some variable-rate plans. Aside from gift cards or free thermostats, some retail suppliers offer low introductory rates. Don't forget to switch after that intro rate expires, though. These plans usually roll you over to a more expensive standard rate after the first billing cycle.

On the other hand, changing rates can make it hard to estimate your utility bills. Especially when you budget your expenses, variable energy rates can throw your budget off track significantly. Keep in mind that some variable-rate plans come with a base charge or a customer service charge that effectively increases your rates.

Some providers offer variable-rate plans that do come with a minimum term length. If you're willing to take that risk, you can benefit from discounted rates even lower than the current variable-rate average. Some utility companies may apply a service or transfer fee if you're switching suppliers more than once a year. Be sure to check with your local utility so you won't get any surprises.

Energy Rate Changes

Variable energy rates can change by the hour, day, or month, based on the plan's terms and conditions when you signed up. The rates offered by energy providers follow wholesale energy prices, but not every change on the wholesale market is reflected in your rate. Rate changes are usually delayed and smaller than market fluctuations. Energy retail providers typically give you reasonable notice of any upcoming rate changes.

Energy prices are market-driven and a result of supply and demand. Demand is directly related to the weather and outside air temperature, and market prices typically follow seasonal patterns. When the demand for electricity or natural gas is high, energy prices increase. Electricity demand typically peaks in the hot summer months, when air conditioning is running around the clock. Gas demand peaks in the winter when heating systems are on. At the same time, electricity is also used for heating while natural gas is used to generate electricity, causing demand to go up respectively. Energy prices are usually lowest in the spring and fall, especially if you're living in a cold or hot climate zone.

Besides your local climate, different fuels used for heating and electricity in different regions influence energy prices. Energy rates change seasonally based on the availability of that fuel. For example, energy rates for electricity may vary less if the power comes from hydropower than from a natural gas-fired power plant. Variable rates can be even more costly during extreme weather events (like a polar vortex) when wholesale prices can increase considerably. At the same time, extremely hot or cold temperatures usually increase your electricity or gas consumption as well, so you end up paying even more.

Are Variable Rates Right for You?

A variable-rate plan is a great solution while you're shopping around for a new retail provider or a new energy plan. Since there is no contract with an early termination fee, you can easily use a variable-rate plan until you find the electricity or gas plan that is right for you. If you're shopping during a time when the rates for fixed-rate plans are going down, and you want to wait until they're even lower, a variable-rate plan can also be a good choice. You can benefit from falling energy prices while waiting for better rates to lock in a fixed-rate plan.

Variable-rate energy plans can also help you save on your utility bills if you're frequently monitoring the energy market and electricity and gas price trends. To save money using a variable-rate plan, you need to be able to adapt to the changing rates by using less energy during times when prices are high. This may be difficult at times when weather conditions require you to heat or cool your home or business.

Fluctuations in energy prices follow seasonal cycles within geographical regions. You may be able to save money by switching back and forth from variable-rate plans to short-term fixed-rate plans if you don't mind the extra time and effort it takes to shop around for a new plan every couple of months.

You can still purchase green energy by choosing a variable rate plan. Many energy companies offer variable rates for electricity from renewable sources, sometimes for the same price per kilowatt-hour. 

All in all, whether to choose a variable-rate energy plan is up to you. Are you willing to spend some additional time watching the energy market and transferring service? Can you adjust your energy consumption at different times of day? And can your budget accommodate a sudden fluctuation in energy prices if and when one occurs? With some careful planning, you may be able to save. 

Finance Guru

Finance Guru