There are many important questions that you should ask a prospective electricity provider before signing a contract. One of the most important of these questions is whether you will be charged at a fixed rate or a variable rate.
Fixed rates and variable rates are two different methods by which provides can charge energy consumers. The type of rate that you choose will influence the amount that you pay on each energy bill during your contract.
Fixed Rate Electricity
With fixed rate electricity, like we offer at Star Energy Partners, you will “lock-in” the rate that you pay for each kilowatt-hour (kWh) of electricity—the base unit that electricity is measured in. This rate will remain unchanged throughout the duration of your contract, regardless of changes to the energy market. You can expect a contract of between 3 months and 3 years in length. There may also be an early termination fee or other charges that will fluctuate from month to month, but that will depend on the rest of your contract.
Variable Rate Electricity
On the other hand, a variable rate electricity plan will adjust according to the rest of the energy market. For example, if the average wholesale per kWh price of electricity drops, your rates will drop as well. However, if the rates increase, you’ll have to pay more for your electricity.
Which should you choose?
Fixed rate electricity is best for its predictability and security. Regardless of what happens in the energy industry, you can rest assured that you will be charged the same rate throughout the duration of your contract. This allows you as an energy consumer to easily budget around your energy bill.
However, variable rate electricity can also prove to be quite efficient, but it’s much more dependent on the energy market. Simply put, your costs will mirror that of the market: if things are going well, then your prices will be low; but if the market suffers, then you might wind up paying more on your electricity bills. Given that most consumers don’t pay close attention to the energy market, these fluctuations from month to month may come as a surprise to most—both happy and unhappy at times.
One reason for caution when it comes to variable electricity rates is that some factors, like the 2013’s Polar Vortex, can cause prices to increase drastically during times of high demand. Events like this can make budgeting around your energy bill difficult and can even be crippling for a family living paycheck to paycheck.
Therefore, while variable rates can be beneficial for the consumer that constantly keeps an eye on the energy industry, the average consumer should choose a fixed rate for its simplicity and consistency.