Are fixed rate energy plans a better deal than variable rate plans? Sometimes. Ultimately, it depends on careful planning and cost comparison. We weigh the pros and cons of both below.
Summary: Recommended Fixed Rate Contracts
Based on the market prices for natural gas and electricity, we recommend the following contract lengths:
|Natural Gas Contracts|
|12 months or less|
|18 months or more|
What are Fixed Rate Plans?
In states where the energy market has been opened to competition, you can either stick with your default local utility, or pick an alternative supplier - which may offer better rates.
With your local utility, you are normally put on a default variable rate plan for energy. This means that the cost of energy varies based on the market cost of electricity or gas. However, many alternative energy suppliers - and a few local utilities - offer fixed rate plans. These are plans where the rate you pay for electricity or gas remains the same for the entire period of your contract.
What's our advice?
Fixed rate electricity plans are a good deal for longer periods of time, while variable rates are better for shorter periods.
Fixed natural gas rates are generally not a good deal for longer periods of time, but shorter contracts may be a good idea, as long as you are able to lock in a competitive rate during a cheaper time of the year.
Bear in mind that variable rates with your local utility are almost always a better deal than variable rates with an alternative supplier. Local utilities usually do not offer fixed rate plans, however.
How Energy Prices are Determined
Normally, the cost of electricity is measured per kilowatt hour, and the cost of natural gas is measured per therm or cubic foot. The amount of energy you consume per month, multiplied by the rate you're paying, equals your monthly bill.
With a variable rate plan, rates can vary on a monthly basis or even an hourly basis. That means, your bill varies each month not only based on how much energy you consume, but how much energy costs when you use it.
On fixed rate plans, the cost you pay for electricity per kilowatt-hour or for gas per therm/cubic foot is the same, each month, for your entire contract period. This means that the only reason your bill varies from month to month is because your consumption has varied. Many consumers like this stability.
Electricity Fixed Rate Plans
The price of electricity per kilowatt-hour in the United States tends to increase over time. However, there are significant fluctuations in electricity price per kilowatt-hour each month and between different states. Consumer demand, weather, time of day, and market prices all have a big impact on the cost of electricity. Electricity tends to cost the most when demand is the highest, since this increases the cost to deliver and produce electricity.
Long Term Gains
Because of the trend for electricity prices in the US, it can be advantageous to lock in a good deal per kilowatt-hour for a longer period of time. Some alternative suppliers offer contracts as long as three years, for example. Though prices may fall (and then rise again) on a month to month basis, they will inevitably increase over the long term. A fixed rate plan - if it lasts long enough - insures you against long-term electricity price increases.
Many Americans just like the peace of mind they get from a fixed rate electricity plan, as well. Just by reducing your usage, you know that you can lower your electricity bills. With variable rate plans, so many factors can go into determining your price per kilowatt-hour that changing your usage may not have any effect on your monthly bill.
Short Term Losses
For shorter periods of a year or less, it is not clear that fixed rate plans are actually a better deal for electricity consumers. Because the price of electricity changes based on the season, or time of day, suppliers must offer a fixed rate for electricity that ensures they don't lose money. Drops in the market price of electricity can be significant, and customers on fixed rate plans will not be able to take advantage of these savings. For shorter contract lengths, consumers on fixed rate plans may actually pay more than those on the variable rates from their local utility.
Also, if a customer notices that prices are lower with a competitor, they often cannot switch. Suppliers often charge an early cancellation fee on fixed rate plans, and fees may be so high that consumers are locked into their fixed rate plan.
The Bottom Line
If you find a competitive fixed rate for electricity, for a period of 18 months or longer, you may very well save money over the contract period. While some suppliers do not charge early cancellation fees, most do. Be sure that you will be happy to stick with this electricity supplier for your entire contract length. The one exception is if you move: You can usually avoid early cancellation fees if you are moving to a new home.
If you provide documentation that you are moving, your supplier will probably not charge an early cancellation fee.
Natural Gas Fixed Rate Plans
Fixed gas price plans are a little less common than those for electricity. With advances in drilling and storage technology, as well as the emergence of new alternatives to natural gas, the price of residential natural gas per therm or cubic foot is actually falling over time in the United States.
|Year||Average US Residential Natural Gas Price, in dollars per thousand cubic feet|
However, like electricity, natural gas prices can change a lot from month to month and time day. Prices of natural gas per therm or cubic foot reach their peak in the summer months, from about June to September. Unlike electricity, the cost of natural gas is the highest during times of low demand. This is because there are high fixed costs to producing natural gas, and in the summer these costs are spread over fewer units - making gas more expensive per therm or cubic foot.
Our Natural Gas Recommendations
For natural gas, our fixed rate advice is just the opposite of electricity. Fixed rate natural gas plans can be a good deal for shorter periods of time, like a year or less, provided that you are able to lock in a good rate during cheaper months. For longer periods of time, you may end up losing money on a fixed rate natural gas plan.
How Do Variable Rate Plans Compare?
If you would like to be on a variable energy rate for a shorter period of time, variable plans generally do not require a contract and have no cancellation fee. However some variable rate plans are a much better deal than others.
Local Utilities vs. Alternative Suppliers
In most US states, your local utility is regulated by your state government. All changes to their rate plans must be approved by the government, and rate change requests are often open to the public. Variable rate plans with your traditional supplier often conform to market prices and overhead costs, more or less.
However, most states do not regulate alternative suppliers. The state government usually has little to no oversight into how alternative suppliers set their prices, meaning they are free charge whatever rate they choose. This can be detrimental to consumers. Some suppliers have some level of consumer protection, with provisions that state that the cost of energy on a variable rate plan will never exceed the month prior by more than 30%. What this means, however, is that the price could conceivably increase each month by 30% - leading to a 6-month increase of nearly 500%!
Alternative Suppliers: the Bait & Switch
Many alternative suppliers offer attractive rates for the first month or three that a consumer joins a variable rate plan. Many consumers report however, that after the price promotion is over, rates skyrocket far above those offered by their local utility. Though there is no cancellation fee with most variable rate plans, it may take up to two months to cancel your service - leaving you with high energy bills in the meantime.
Bear in mind that even if you choose a fixed rate with an alternative supplier, you may be automatically shifted to a variable rate plan at the end of your contract, without much notification.
Our advice: In most cases, you should not sign up for a variable rate plan with an alternative supplier, even if the initial rate is attractive.
If you prefer a variable rate plan, opt for one with your local utility. For fixed rates, check out alternative suppliers.
Time of Use Plans: Peak & Off Peak Hours
Time of use plans are another type of variable rate plan, where the rate you pay for electricity or gas depends on when you consume energy, either based on the time of day or season. Local utilities and alternative suppliers both offer time of use plans.
These plans are generally not a good idea for residential customers unless they are able to switch at least 80% of their usage to off-peak times. There is a significant difference between peak and off-peak prices, and some consumers may be able to take advantage of savings. However, the majority of consumers will not be able to benefit.