What is a Variable-Rate Energy Plan?

Thanks to deregulation, customers like you can shop around for the best rates in electricity and natural gas. Choosing a variable-rate energy plan is one choice that is available to you, and it offers plenty of flexibility. Here’s how it works.

The basics of a variable-rate plan?

A variable-rate energy plan means the rate your pay for your electricity or natural gas supply may fluctuate from month to month. This monthly rate will be based on the current market prices that your energy supplier pays to obtain the natural gas and electricity it sells to you. Variable-rate plans are flexible because you are not locked into a contract — unlike fixed-rate plans – so if you find a better deal and want to switch plans or energy providers, you won’t have to pay a penalty.

Why do energy prices fluctuate?

Energy prices are driven by the market. Think of them as you do gasoline prices. The price at the pump changes just about every day, thanks to a variety of influences at work, such as the market price for crude oil, distribution costs, and seasonal demand.

Ever notice that gas prices tend to jump up a bit before a long holiday weekend? The same is true for energy prices. Natural gas as a commodity is traded on the market, so the cost to purchase can will also change from month to month. To see how natural gas prices have risen and fallen over the years, visit the U.S. Energy Information Administration website.

And did you know that the cost to bring electricity to your home literally changes from day to day — hour to hour, even? Price depends on many factors, like weather, demand, fuel prices to generate the electricity, the distribution system and the market. So while you as the customer don’t have to contend with daily price shift, your variable-rate plan still forces you to account for changes on a monthly basis.

When you are creating your household budget, your energy costs are one expense that can be difficult to plan. So the reality of consuming energy, whether it’s at the pump or in your home, is that the prices are in constant flux. Like the pump, they may hover in a general area for a period of several months, but they also can spike or take a tumble.

Is a variable-rate energy plan right for you?

A variable-rate plan might be ideal for you if you like to shop around and keep an eye on prices. Without a contract holding you back, you can quickly and easily jump to a fixed rate plan if you see a price you are comfortable paying for the longer term. This flexibility also allows you to switch providers altogether without any penalty charges.

But be prepared: If you are in a variable-rate plan and you get caught in a big seasonal price hike with your supplier, chances are good prices will be also be higher with other suppliers, due to the same market and seasonal conditions. But this variation can deliver the biggest upside to opting into a variable-rate plan in the vein of bigger savings for you when the prices go down. Unlike customers who are locked into a price that is set by a contract for several months, lower prices in the market can mean more money in your pocket.