Many retail electricity providers are so confident in their superiority to the default option they can guarantee savings on your electricity bill by basing their rates on a certain percentage off the customer’s default utility’s average residential rate.
Understanding the different types of plans as well as the “Price-to-Compare” will help you determine how much savings you are actually receiving. While a guaranteed savings of say, 10% below the utility’s rate is great, there may be other providers that have even better rates. In other words, “guaranteed savings” doesn’t mean the “lowest prices”.
Two Types of Plans
There are two different ways that the rate can be determined for an electricity contract. Many providers offer both types, and it is very important to know the difference.
- Variable-Rate. When you sign up for a variable rate plan, you pay rates that vary with the market and can change monthly or even daily. Generally, this type of plan is offered month-to-month, without having to sign a contract. This type of plan is not recommended for the average electric user, since variable rates are more often higher than fixed rates. Vacation home owners and persons planning on moving to an area outside of their utility’s service in the near future area should consider this type of plan.
- Fixed-Rate. When you sign up for a fixed-rate plan, you pay one set rate for the supply of electricity for the duration of your contract. This rate is disclosed up front, prior to signing a contract. The downside of a fixed rate plan is that you are locked in until the contract expires (almost all providers charge an early termination fee). However, this type of plan is recommended for the average electric user, since variable rates are most often higher than fixed rates.
Most shopping customers opt for the fixed rate plan in 12- or 24-month duration terms, although some duration terms are as little as three months. Generally, the shorter the term, the higher the rate. If you opt for anything more than 24-months, you take on more risk because the price of electricity (see “Price-to-Compare”) could go down, and you’ll be stuck paying a higher rate.
In most deregulated states, the “Price-to-Compare” is the rate that you would pay if you receive your electric supply from your default utility. Unless you have switched to a retail electricity provider, your utility supplies your electricity.
On your bill, there are two types of charges:
- Transmission and Distribution. This is charged to you by your utility and doesn’t change if you choose to buy your electricity from a retail electricity provider.
- Supply. Electric supply is what you are able to shop around for.
When shopping around, choose a rate that is lower than your utility’s Price-to-Compare. On your electric bill, look for the supply charges. It will show the rate that you are being charged – which is called the Price-to-Compare if you receive your electric supply from your utility. This charged is expressed in cents per kWh and will look something like:
8.139 cents/kWh OR $0.08139/kWh
Do Even Better
Once you have figured out which companies are always going to give you a better deal than the utility, you can start to make a choice between these. Pay attention to past rate changes, signup bonuses, and anything else that might make a difference to the contract. When shopping around, remember that even a tenth of a cent can make a huge difference. By comparing providers available in your service location, you can find the best deals on electricity.
Learn more about lowering your electric bill.