As you are shopping for a new electric or natural gas provider you will notice that some plans have fixed rates, variable rates or even a combination of both. It’s important that you understand the difference and how this can impact your monthly utility bill before entering a contract. Also keep in mind many providers have contracts that are different lengths and that there can be an early termination charge.
What Is a Fixed Rate?
A fixed rate or fixed pricing refers to a price per unit of electricity (kilowatt-hour) or natural gas (therm) that is set and won’t change for a period of time. A fixed rate is a guarantee that your rate will not change during that time even if the market fluctuates.
Pros
- Consistent pricing throughout your contract
- Easier to budget and anticipate your utility bill
- Keep a lower rate even if the market adjusts higher
Cons
- Possible to have a higer rate if the market fluctuates lower
What Is a Variable Rate?
A variable rate or variable pricing allows your rate to adjust upwards and downwards to match any market fluctuations. It is important to understand:
- How often your rate can change. Some providers will adjust on a monthly, weekly or even daily basis.
- What the maximum price you can be charged is or if there is no limit to how high the rate can go. You should be aware if you are protected in the case the market price increases dramatically.
- How does the provider set the rate. Some providers will have a specific formula they use and others may use a non-specific method tied to market price.
Why Do Utility Rates Change?
Utility rates change at different frequencies depending on several factors:
- Regulatory Changes: Utility rates are typically subject to regulation by government agencies at the local, state, or national level. Changes in these regulations can lead to adjustments in utility rates. These changes typically occur after regulatory reviews or legislative actions.
- Market Conditions: Fluctuations in energy markets, such as changes in the prices of fuel commodities like natural gas or coal, can impact utility rates. These changes occur very frequently, sometimes even daily, based on market dynamics.
- Infrastructure Investments: Utility companies may need to upgrade or incur maintenance on their infrastructure, such as power plants, transmission lines, or water treatment facilities. These investments can lead to changes in utility rates to cover the costs. These types of increases in utility rates occur infrequently.
- Demand-Side Factors: Changes in consumer demand for utilities, such as during peak usage periods or due to shifts in population or economic activity, can influence utility rates. These changes may result in adjustments to rates to manage supply and demand balance.
- Environmental Policies: Policies aimed at promoting renewable energy sources or reducing carbon emissions can also impact utility rates. For example, mandates for renewable energy targets or carbon pricing mechanisms may lead to changes in utility rates over time.
Utility rates often change seasonally, but they can also change periodically or in response to specific events or conditions, and the frequency of these changes can vary based on a range of factors affecting the utility industry and the broader economy.