When shopping around for a retail electricity provider, you’ll notice that many offer both fixed-rate and variable-rate plans. There are benefits to both, but it is very important to know the difference to ensure that your plan is beneficial to you and your electricity needs.
Fixed-rate plans allow you to lock in one low rate for the duration of your contract. The most common contract lengths last for 3-, 6-, 12-, and 24-month terms, although some providers offer terms for up to 36-months.
- Price Protection for the duration of the contract
- No need to constantly monitor and compare rates
- Helps to budget for the amount on your next bill
- A choice between contract lengths – Shorter contract lengths will protect you if market prices fall, and longer lengths will protect you if market prices rise. The choice is yours.
- Early termination fees if the contract is cancelled prior to its expiration
- If market prices fall, you may be stuck paying rates that are higher than market prices
Variable-rate plans are tied to the market price of electricity. Variable rates are almost guaranteed to change monthly and may even change daily. Generally, you will not be locked into a contract and may switch providers at any time.
- Month-to-month contracts that allow you to switch providers any given month
- No termination fee or penalty
- Initially, rates may be lower than the provider’s fixed rate plan
- Rates can increase at any time, without notice
- You’ll need to monitor the rates you are being charged each month and compare with other providers to ensure you’re paying a low rate
Which to Choose?
Ultimately, the choice is yours and should be based on your level of comfort. If you are considering a variable rate because lower prices are being advertised, ask yourself these questions:
- Will you constantly monitor and compare your rates with other retail electricity providers?
- Do you understand the electricity market and enjoy analyzing it daily?
- Would you be comfortable with your rate increasing by more than 3 cents/kWh without notice?
- Do you think electricity prices will decrease over the next year or two? .
If you’ve answered ‘yes’ to these questions, then choose a variable rate. For most, however, we recommend choosing a fixed-rate plan with a term of 6- to 24-months.
Keep in mind, if you are under a fixed-rate plan, you will most like be switched to a variable-rate plan when your contract expires. Shop around to avoid high costs.