Fixed Rate, Variable Rate, or Indexed Rate?
In this blog, we will compare and contrast the three types of electricity plans and why Energy Ogre prefers one over the others for our members. Ever Since Winter Storm Uri, this has been a popular topic in Texas. We hope this article helps you decide which type of electricity plan is best for you!
What are the three types of plans, and how do they work?
Which plan is the best?
Which plans does Energy Ogre pick for its members?
How Did We Get Here?
In 2002, the Texas electricity market deregulated, which allowed private companies to buy wholesale electricity to sell directly to consumers. Thus, competitive electricity pricing came into effect.
Typically, competition is a great thing for consumers, regardless of the product or service. In this case, however, it’s only a positive change for the Texans who find the best plans offering the lowest rates. Many Texans statewide were unsure or uninformed of this massive structural shift.
Specifically, many older Texans remained with their area’s legacy provider after deregulation, assuming they were better or still the sole electricity (utility) company. Similarly, millions of younger Texans struggled with shopping the market, and they often ended up overpaying for electricity, too. Thus, both groups failed to capitalize on the competitive electricity plans offered.
Nearly 20 years later, we’ve calculated that 90% of Texans continue to overpay for electricity year after year. Why is that?
First, the market is difficult to navigate, and shopping for electricity can be confusing and time-consuming. Also, there are hundreds of retail electricity providers (REP) who sell electricity, and collectively they offer thousands of plans. I know, that sounds like too many options. Is your head hurting yet?
Speaking of plans… let’s get back to the topic at hand. There are three different types of plans available to Texans. Let’s begin comparing and contrasting them all.
There are fixed-rate plans, variable-rate plans, and indexed-rate plans—all of which have different characteristics that drastically affect how much you pay each month. Typically, there are more than a thousand plans on the market at any given time, composed of these three types.
Therefore, consumers have to understand the differences between each type of plan to decide which is best for them. For example, one key difference would be some plans require contracts and others don’t.
Whether it’s contract or price-related, allow us to explain the pros and cons of each type of plan. Please keep in mind your delivery fees are separate from your energy charge and may change at some point, regardless of which type of plan you're in.
Electricity prices fluctuate based on the time of year due to electricity demand changes caused by seasonal temperature swings. Therefore, a fixed-rate plan guarantees you the same price per kilo-Watt hour (kWh) for the duration of your contract. Fixed-rates plans can last anywhere between 3-36 months.
For example, enrolling in a fixed-rate plan will typically cost more in the middle of winter and summer. The most important thing to understand is fixed-rate plans lock you into one electricity price for the entire contract.
Look at it this way—being locked into an overpriced plan with a long contract could lead to overspending. But if you can find a low, cost-efficient plan that is 9-12 months long, you will typically benefit from being locked into that price. Therefore, you will have saved a fair amount of money during that contract when comparing your plan to a variable or indexed-rate plan.
Simple, right? There’s a little more to the story. There are two different forms of fixed-rate plans. The first is an “all-in rate plan”, which is rare, mainly because REPs assume a level of risk when they offer these types of plans. Essentially, the REP names a price that encompasses the energy rate, delivery fees, taxes, and fees assessed by the Public Utility Commission (PUC).
Next, you have the “pass through rate plan.” This is the most common form of fixed-rate plan that most Texans have. It may seem complicated, but I assure you it’s not.
“Pass-through” means the delivery charges and PUC-assessed fees are subject to change during your contract. In fact, TDSP fees usually change twice a year. Therefore, your REP will “pass through” those charges onto your bill. This type of plan is more transparent and is typically cheaper than the “all-in” alternative.
-your rate will not increase if market prices rise
-budgeting each month is easy because your electricity costs will remain relative to the month prior--approximately a little more or a little less
-your rate will not decrease if market prices drop
-fixed-rate plans require contracts, and you may be subject to an early termination fee (ETF) if you end your contract before the expiration date
As the name would suggest, the prices of variable-rate plans change monthly. The variable rate changes at the discrepancy of each REP—there are no other underlying factors that determine your rate.
It’s worth noting variable rates are the biggest money-makers for REPs. Some plans may start with a low rate for a month or two, but they typically jump to a higher rate later on. That’s why it’s important to avoid variable-rate plans if possible.
-your rate will also decrease if electricity prices decrease
-there are typically no contracts for variable-rate plans, so you won’t have to worry about paying an ETF
-Monthly budgeting is difficult because your rate can change
-your bill is subject to increase when electricity prices spike
Finally, indexed-rate plans are the most complicated and most uncommon of the three types of plans. So we’ll just cover the basics. With an index rate, your electricity price is directly connected to an underlying variable, or index, which is typically the cost of natural gas.
Therefore, the price you pay is tied to the fluctuations of that index. Indexed-rate plans are rare, and you usually won’t see them advertised or offered by REPs. The electricity rates for indexed electricity plans vary month to month, like variable-rate plans.
-prices can decrease according to the variable or index you originally agreed to, similar to variable rates
-the price of the variable can increase, making your monthly electricity costs unpredictable
-you must actively monitor the price of the variable or index and how it affects your electric bill
-demands the most research and knowledge of all three types of plans
Which is the Best? We’ll Let You Decide.
We’ve tried to explain what each type of plan entails while showing some of the pros and cons of each. Hopefully, things were simple and easy to digest.
If not, allow me to sum everything up quickly.
Fixed-rate plans are stable and predictable--you may not always have the lowest price on the market, but you won’t be subject to high price spikes. If in the right plan, you will still save the most money in the long run.
Variable-rate plans don’t have contracts and can be cost-effective, but they can also expose you to high price spikes.
Indexed-rate plans can offer low prices, but they require the most effort and monitoring, in addition to research and an understanding of the electricity market.
What Type of Plan Does Energy Ogre Pick for Customers?
Energy Ogre prefers fixed-rate plans for our members. As we’ve said, fixed rates offer stability, predictability, and savings when data is used to choose the right plan. Knowing how much electricity you typically use each month is vital to making the right decision.
Additionally, fixed rates allow our members to live the way they want—doing laundry, running the dishwasher, and overall, using electricity when and how they would like. We find most people, especially our members, prefer not to drastically alter their lifestyle in avoidance of expensive electricity bills.
With Energy Ogre, our members get to spend less while living more—and that’s a beautiful thing. They have the assurance of knowing they’re in the best plan. If you’re not a member yet, please review our benefits page to learn more about what we can offer you—all for the low price of $10. Yep, that’s just two iced coffees. Speaking of money, are you curious to see how much money we could save you with a new, fixed-rate plan?
If so, run our savings calculator to learn how much money you could save! Grab a recent bill, put in a few numbers, and then prepare to do your happy dance. The whole process, dance included, should take less than three minutes!
Your life could be simpler and more affordable. After all, you deserve the right plan with the best rate! Sign up today and get a free month of our service. Click this link to get started!