Texas consumers have many options when it comes to shopping for an electricity plan. In addition to selecting an electricity provider, consumers can choose from a variety of plans. Renewable energy, free nights and weekends, and prepaid electricity offers are among the choices available for Texans. The most basic choice, however, is whether to select a fixed price or variable price electricity plan.
Fixed Price Electricity
Fixed price electricity offers are the most common and popular type of electricity plan. During the term of the agreement, your rate can only change under very specific and limited circumstances. A regulatory change, for example, might result in a rate change. Increasing wholesale electricity prices would not allow the electricity provider to change your rate.
While fixed price plans protect you from market price fluctuations, they also obligate you to remain with the provider for the term of the agreement. If you switch to another provider before the end of the term, you pay an early termination penalty. Therefore, you need to select a fixed price electricity term that you can live with. The most popular fixed price terms are 12 and 24 months.
Variable Price Electricity
Variable price electricity plans do not come with a price guarantee beyond the first month. Also called month-to-month plans, these offers swap price certainty for contractual freedom. Your rate will change every month but you have the ability to switch providers or convert to another product without penalty.
Rates usually vary to reflect changes in wholesale market prices. However, the exact mechanism varies by electricity provider and is confidential. An exception would be month-to-month plans tied to natural gas prices. Plans like TXU Energy’s MarketEdge are linked to gas prices using a formula specified in the Electricity Facts Label (EFL). If variable prices get too crazy, you can shop for better options or try another provider’s variable rate product.
In electricity markets, the perception is that variable rates tend to be lower than fixed price products in the long term. Naturally, there are many examples of when this concept fails. Even when it does hold, variable rates can be a wild ride and not a good choice for the faint-hearted.
For illustrative purposes only, we took a deep dive into products offered by one electricity provider in 2016. This example assumed that a customer contracted for a 12-month fixed price electricity offer at the very beginning of 2016. This same electricity provider also had a variable price month-to-month electricity product. We calculated how much a customer would have paid the provider on each of the products during the year.
In this example, the customer would have fared better on the variable rate product with annual savings of just over $121. The fixed rate product, however, provided a much smoother ride given that August was not an especially good month for the variable rate.
Should you pick a variable rate instead of a fixed rate for your home? Unfortunately, there is no correct answer when looking forward. In the example above, the benefit of being on a variable rate depended on which months you were on the rate and for how long. In addition, it is difficult to predict how electricity providers will adjust their variable rates from one month to the next. What ended up being a good approach last year may not work out next year.
The best advice is to choose a fixed rate electricity plan if you want price certainty and are willing to stay put for the term of the agreement. If you want flexibility and can tolerate fluctuating prices, a variable rate plan may be the best choice.