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Variable vs Fixed Electricity Plans

Variable vs Fixed Electricity Plans

If you’re shopping around for a new electricity plan, you’ll have to make a decision about whether your want your rate to change from month to month. The two basic options to compare rates¬†are a fixed plan, which stays pegged at a set rate, and a variable plan, which changes along with the market.There are pros and cons to both strategies.

Fixed Rate

If you choose a fixed rate plan, you will pay the listed rate each month until your contract expires. If the market price of electricity goes up, you’ll be saving money; if the price goes down, in a sense you’ll be overpaying. Fixed rate plans are the safe option because they’re predictable: you can plan your annual budget knowing fairly well what your electricity bills are going to look like. Fixed rate plans usually start out at a slightly higher rate than others because of their potential to beat the market.

Variable Rate

Variable rate plans, also known as index electricity plans, change according to some evaluation of the market. If you are interested in the energy futures market, you might have some opinion about how prices are going to change during the next year or two. If you’re confident that they’ll go down, you should buy a variable rate plan. (Naturally, if you think that prices will increase, you should get a fixed rate plan.)

Variable rate plans offer probable savings in exchange for the possible risk. If you choose one of these plans, you’re very likely to start out paying a lower price than you were before. You will have to be prepared for the possibility that prices will increase and you’ll get a high bill. At the same time, you’ll be paying less than people signed up with the default plan from their utility company.

Other Plans

Some companies offer contracts that combine a fixed and variable rate. These fall somewhere in the middle of risk and predictability. These intermediate plans entail paying for some of your energy at the fixed rate (set when you sign up) and some at the market price for the month in which you use it. The division is often but not always half of one and half of the other.

Plans also exist that divide the risk across time; you’ll pay a fixed rate for some number of months, then subsequently snap back to the market. These plans prevent your rate from diverging too far from the prices everyone else is paying.

Other Factors

When you set out to compare electricity plans, you need to consider the whole package that you’re buying. The duration of your contract is independently important because it affects your ability to change providers in the future. But it’s also important in relation to the variability of your rate.

If you select a fixed rate, signing up for a 24 month electricity plan instead of a 12 month plan means you are committing yourself to an extra year at today’s prices. Your profit on the deal still depends on unpredictable fluctuations in price, but you are giving your plan more time to diverge from the market rate.

Make sure to think about signup bonuses (and cancelation fees) as well, since these can have a large impact on the overall cost of your electricity.

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