Fixed-Rate vs. Variable-Rate Electric Plan: Which Is Best for You?
Fixed rate electric plans offer convenience, protection and predictability. Variable-rate plans offer flexibility and the potential of savings. Here's how to know which is better for you.
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It's not just how much your electricity meter spins that determines your electricity bill. Depending on your electricity plan, it might matter what time of day it spins.
Quick gut check: Are you the type of person who'd prefer to pay the same price for electricity all year, or would you rather take your chances with energy market ups and downs?
That's essentially what you're choosing between when picking between a fixed- or variable-rate electric plan.
But let's back up for a second. You'll have this choice only if you live in one of the 18 states that offer consumers deregulated energy markets, along with the District of Columbia.
We'll help you find the best electricity rates in your area
If you live in a place where you're allowed to choose your energy supplier, understanding the difference between the types of energy plans is the difference between predictability and stability versus potential cost savings and flexibility.
Can I choose my energy plan?
Currently, only 18 states and the District of Columbia offer their residents some sort of choice when it comes to their energy suppliers (your energy distributor or utility is typically locked in). Check out this CNET guide to see which states currently offer consumers a choice.
We'll help you find the best electricity rates in your area
In energy choice markets -- formally known as deregulated markets -- you can usually choose from a variety of pricing structures as well as where your energy comes from (such as renewable sources). Making the right choice can net you savings on your energy bill, while making a bad one could end up costing you more. One study, out of Harvard University and the University of Pennsylvania, even found that prices are higher in deregulated markets, so buyer beware. Still, it's worth at least considering your options, especially if you prefer predictability.
What is a fixed-rate electricity plan?
The industry standard fixed-rate plan is simple: You pay the same price per rate for electricity no matter what's going on in the world that influences energy prices. It wont matter what time of day, month or season, with a fixed-rate plan, your energy rates remain flat from month to month (they typically change only upon approval from the state regulator).
As as long as your energy usage remains similar, your bills month over month should look close to the same. The benefit of these plans is predictability, stability and protection from rate hikes.
Fixed-rate plans usually come with a contract or agreement for a set term ranging from six months to three years. The longer the contract, the longer your rate is locked in and protected. Once your contract expires, you can shop around for a new provider and plan, or switch to a variable rate plan with no strings attached.
What is a variable-rate electricity plan?
A variable-rate is exactly how it sounds. Your cost per kilowatt fluctuates based on market conditions. Energy rates change for variety of reasons, such as seasonality, consumer demand, utility cost adjustments or energy market changes. Sometimes variable rates are lower than a fixed rate and sometimes they are the same or higher.
With a variable rate, you can take advantage of lower price conditions when it occurs. Variable rate plans typically are not under contract -- meaning you're free to switch energy providers without penalty at any time.
The risk of a variable rate plan is you remain unprotected from utility rate hikes or market conditions that influence the cost of energy prices.
What is a time-of-use rate plan?
With time-of-use rate plans, energy suppliers will charge different rates based on what time of the day it is. One common example is a "free nights" plan where you can use electricity at no charge -- or at a reduced rate -- during the designated free periods.
It's important to pay attention to the fine print on these type of plans. Sometimes the free period aren't the most convenient and you may end up paying more in the long run if not used properly. They can, however, work well for you if you plan to be home using electricity during off peak hours. For example, charging your electric vehicle or doing laundry late at night.
Utilities can benefit from your participation in time-of-use plans since they are designed to discourage energy usage during peak hours where the grid is in high-demand.
What is a prepaid electricity plan?
The best analogy for prepaid electricity plans are prepaid cellphone plans, according to Mark Rawson, senior VP of strategy and partnerships at Rhythmos.io, an EV charging optimization platform for utilities and fleets. "You pay a flat rate and get to use as many minutes up to your allocation for that rate. Any minutes over that period, you pay a different rate," he said. "I don't think it's that common." He adds that utilities don't prefer these types of plans because they have no mechanism to change consumer behavior, such as getting you to use your dryer at night.
What type of electricity rate plan is best for me?
The best type of electricity plan for you depends on a few factors.
- How much energy you typically use per month
- How much you're willing to risk market rate changes
- If you're willing to plan around you use your electricity
If you're someone who just wants to set it and forget it and have some predictability in your billing, a fixed rate plan is for you.
If, however, you're willing to do energy intensive activities during off-peak hours, there's potential savings to be had by switching to a time-of-use plan. It'll require more vigilance on your part, but you're likely to be rewarded for those efforts.
If you're the type that pays attention to the seasonality of rate changes, want to take advantage of low market rates when they occur or just don't like commitment to contracts, a variable rate plan might be for you. At least until you decide on a fixed-rate agreement later.