FAQ: The Difference Between Fixed And Variable Power Rates

By: Jordan Hobfoll, Co-Founder and CEO, Energy Simply LLC

When shopping for plans you will likely come across two different types. The first is a fixed or fixed-term plan. The other is a Variable or month-to-month plan. So what is the difference between the two?

FIXED TERM

Fixed term plans allow you to lock in a fixed price for your power over the plans term which might range from 3 to 24 months. This kind of plan gives you security over the term that your price per kWh will not change though your monthly bill will fluctuate based on your actual usage.

The main thing you have to worry about with these plans, besides choosing the lowest price, is making sure you don’t get caught sleeping at the end of the plan term. If you do you may end up in an expensive month-to-month plan.

VARIABLE or MONTH-TO-MONTH

Variable plans on the other hand only give you the price per kWh that was advertised to you for one month guaranteed. Thereafter, the price will fluctuate based on the “market.” So in month two the price could be theoretically lower or higher. With this plan you lack certainty. If there is a natural gas shortage due to a severe winter you could be hit with a much higher rate. Some people have seen their rates increase by as much as 4x. The truth is most companies have a very opaque process for setting the variable rates and just like in used car sales they have an information advantage on you that they can leverage to overcharge you. I’m sure that some companies have honest methodologies for determining variable rates but the truth is that it is extremely hard to tell if that’s the case.

WHAT DOES THIS MEAN FOR YOU?

Due to the information disparity between you and the power companies, opacity of the variable rate market, and the certainty that comes from fixed rates we strongly recommend that you always choose a fixed rate for your power. You will never be surprised and you will be able to do fair comparisons between companies.

Remember to watch out for the expiration of your fixed plans, however. If you aren’t paying attention, you will get thrown onto a variable, month-to-month plan when you plan expires. SO make sure you are at the ready to sign yourself up for a new fixed rate plan when your is about to expire.

For those of you who don’t want the hassle of tracking your plans and want to avoid getting stuck on month-to-month plans because your life is too busy to remember to switch, Energy Simply’s Gold Plan is perfect for you. We will sign you up for the best plan, track your expiration and switch you automatically. Click Here to Learn More.

Jordan Hobfoll is the Co-Founder and CEO of Energy Simply. He previously worked at McKinsey & Company, where he was a consultant for some of the largest electric utilities in the United States. Jordan also holds an MBA from the University of Texas at Austin and a B.S. in Finance with High Honors from the University of Illinois.

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