Variable vs. Fixed Energy Rates - Which Is the Better Option?

Shopping for a new energy plan can be a challenge. With the power to choose your electricity or natural gas supplier, energy customers in deregulated energy markets can choose between various plans with different term lengths, rate structures, and many other options that come with the different plans.

When you're searching for the right energy plan, it is important to find out whether variable energy rates or fixed energy rates are right for you. The amount you pay on your monthly utility bill may fluctuate significantly based on the type of energy rate you choose. When you want to figure out whether variable or fixed energy rates are the better option for you, it is important to know about each one's pros and cons.

What Is A Fixed-Rate Plan?

A fixed-rate energy plan is an electricity or natural gas plan where the price for every kilowatt-hour (kWh) or therm of gas remains fixed until the end of the contract term. Some suppliers make small seasonal adjustments based on seasonal price differences in the wholesale energy market. However, your fixed energy rates are always predictable, and changes only occur on a predetermined schedule. On shorter plans, the price typically remains the same for the entire term of the contract.

The price you're actually paying for fixed energy rates depends on the energy prices on the wholesale market at the time you sign up for your plan. If energy prices are low, you can lock in a cheap rate for your contract's entire length. However, if you sign up at a time when rates are high, you'll have to pay a more expensive rate until your contract ends. Contract duration periods for fixed-rate energy plans vary, based on the Retail Energy Provider (REP) you go with. Typically, the term lengths for electricity or gas are 6 months, 12 months, 18 months, and 24 months. Sometimes, you can find 3 month contract terms as well.

With a fixed energy rate plan, the amount you pay on your utility bill will still change from month to month. You're paying a fixed price per kWh of electricity or therm of gas. The amount on your bill will vary with the amount of energy you're using every month.

What Is A Variable-Rate Energy Plan?

A variable-rate energy plan is an electricity or natural gas plan where the price for every kilowatt-hour (kWh) or therm changes periodically as energy market prices change. Variable energy rates typically can change every month, and your energy retail provider will give you reasonable notice.

While variable energy rates follow wholesale energy prices, they are still predictable to a certain extent. Whenever wholesale energy prices are low, residential energy rates are low as well; when prices go up, your rate will go up. Energy prices on the wholesale market are subject to supply and demand, mainly based on your local climate, weather conditions, and ambient air temperatures.

Pros and Cons of Fixed Energy Rates

Fixed-rate energy plans provide reliability and are a great advantage when you're budgeting. When you sign up for a fixed-rate energy plan, you lock in a rate that will stay the same for the contract's term length. The only variable you have to estimate on your utility bill when budgeting is your energy consumption. With fixed energy rates, you don't have to worry if wholesale energy prices increase. Your rate will remain the same. Depending on your contract length, you don't have to shop around for a while, which can be an advantage if you don't want to compare prices constantly.

However, if wholesale prices decrease, you won't be able to benefit from lower prices with a fixed-rate plan. This is especially true if you locked in your fixed-rate at a time when prices were high. While your energy rate is fixed, you are bound to the contract until it expires. If you cancel the contract ahead of time, you typically have to pay an early termination fee.

Pros and Cons of Variable Energy Rates

Variable energy rates let you benefit from low energy prices on the wholesale market. When market prices are going down, your residential variable rate will also decrease. You can save money when you monitor the wholesale prices and switch suppliers or adjust your energy consumption whenever your rates increase. The biggest benefit of a variable-rate plan is that you are typically not bound to a contract.

The downside of variable energy rates is the uncertainty that comes with changing crates. When you're budgeting, you have to estimate the varying energy consumption from month to month. You also have to consider the changing rates per kWh of electricity or therm of gas with variable energy rates. With a variable-rate plan, you're betting on low average energy rates. When energy market prices are going up, your residential rate will go up as well. Saving money on your utility bill usually takes some effort with variable energy rates. You should continuously monitor the energy market and be ready to shop around for a different plan when rates go up.

Variable Vs. Fixed Energy Rates

While variable-rate plans usually offer full flexibility, fixed-rate plans typically come with contracts of six months to three years. Whether variable or fixed energy rates are the better option depends on your individual situation. Both types can offer unique benefits to electricity and natural gas customers. 

Typically, fixed-rate energy plans are a better option for anyone who wants some consistency and a better basis to build a budget. With fixed energy rates, you may pay a little more for your energy to gain that price stability.

Variable-rate plans are usually better for risk-takers, who like to stay current with the energy market and possibly save some money on their utility bill. Variable-rate plans are also a great option for anyone who is about to move or simply likes the flexibility of not being stuck in a contract.

When you're trying to find out what type of energy rate makes more sense for you, you can estimate your annual energy consumption and calculate the average cost for each plan. Most retail providers have historical rates available, which give you an idea of how much variable rates fluctuate. Energy prices typically follow seasonal patterns, which may result in average variable rates that cost the same as fixed rates over time.