Understanding Fixed-Rate vs. Variable-Rate Electricity Plans

When it comes to choosing your electricity plan, the options can feel like a maze of numbers, contracts, and fine print. One of the biggest decisions you’ll face is whether to lock in a fixed-rate plan or ride the market with a variable-rate plan. Both options come with their own advantages, risks, and “true cost” factors that aren’t always obvious at first glance.

In this blog, we’ll break down the differences between fixed-rate and variable-rate plans, explain how each one works, and help you figure out which option makes the most sense for your home, your budget, and your lifestyle.

With a fixed-rate electricity plan, the price you pay per kilowatt-hour (kWh) stays the same for the entire contract term. Your total bill can still fluctuate each month based on your electricity usage and utility fees, but the rate per kWh will not change. This type of plan usually has a long-term contract lasting between 3 and 60 months, depending on the options offered by your retail electricity provider (REP). Fixed-rate plans charge you a set price per kWh, regardless of your usage. This is the plan that most households would benefit from and should choose.

In the electricity world, “fixed-rate” doesn’t always mean what you think. Energy companies often label any plan that isn’t variable as fixed, including time-of-use (TOU), green energy, tiered, and bill credit plans. But the electricity rate in these plans can still vary (within a specified range) depending on the plan’s structure, such as the time of day you use power or the total amount you consume. Having said that, the rate for any of these plans won’t change monthly based on market conditions.

It’s also important to note that fixed-rate electricity plans are different from flat-rate plans. Flat-rate plans charge a set monthly fee regardless of how much electricity you use within a certain range. This can provide stability and predictability, but can result in overpaying if you use less energy.

At Power Wizard, we make it easy to see the difference. Our comparison tool lets you filter and compare hundreds of plans to find actual fixed-rate options. You get clear, honest pricing and the power to choose a plan that really fits your needs.

Pros of “True” Fixed-Rate Plans

Fixed-rate electricity plans are the simplest type of plan. Here’s why many households choose them:

• Price certainty: Your rate per kWh is guaranteed for the entire contract, no matter what happens in the energy market.
• Predictable monthly costs: Because your rate doesn’t change, you can budget more easily without worrying about surprise increases caused by market spikes.
• Protection from volatility: Energy prices often fluctuate with demand, fuel costs, or weather conditions. A fixed-rate plan shields you from those fluctuations, so you don’t have to constantly track the market.

Cons of Fixed-Rate Plans

Despite their benefits, fixed-rate plans have a few potential downsides to consider:

• No benefit from falling prices: If market rates drop, you won’t see savings. You’ll continue paying your contracted rate until your plan ends.
• Early termination fees (ETFs): Most fixed-rate plans come with monetary penalties if you cancel or switch providers before your contract is up, unless you are moving.
• Might have slightly higher rates: Because providers take on the risk of market changes, fixed-rate plans can be priced a little higher than variable-rate plans. It all comes down to seasonality and market fluctuations.

A variable-rate electricity plan (also known as variable-price) has per-kWh prices that can change from month to month. Your price is tied to market conditions, fuel costs, weather, and other factors outside of your control. These plans typically do not have long-term contracts.

Some providers offer variable-rate plans with an introductory rate. After that promotional period ends, your price typically adjusts to match current market rates, which means your bill may increase or decrease.

Variable-rate plans can be a smart short-term option for certain situations. If your contract ends while summer prices are still high, you might choose a variable plan for a month or two until rates drop, then switch to a fixed-rate plan. They’re also ideal for landlords, realtors, and contractors who need temporary power for property showings, renovations, or home staging.

Pros of Variable-Rate Plans

Variable-rate plans appeal to people who want more flexibility and are willing to accept some risk. Benefits include:

• Potential savings when prices drop: If the market rate goes down, your electricity costs can fall, too.
• Flexibility: Variable-rate plans don’t require a long-term contract, so you can switch providers without paying ETFs.
• Good short-term option: Ideal for those needing power for short-term situations or anyone who isn’t ready to commit to a long-term contract.

Cons of Variable-Rate Plans

The trade-off for flexibility is less stability. The disadvantages of variable-rate electricity plans are:

• Rate spikes: Prices can rise quickly when demand increases, fuel costs rise, or severe weather strikes.
• Unpredictable bills: Because your rate changes monthly, it’s harder to budget and plan for your energy expenses.
• Less protection: You don’t get the same stability as fixed-rate plans, especially during high-demand seasons when rates are usually higher.

The biggest difference between variable and fixed electricity rates is the amount of stability and flexibility they offer. Power Wizard’s energy experts have compared them side by side below.

Use Cases and Examples

Imagine a homeowner in Texas with a fixed-rate plan paying 14¢ per kWh. During a summer heatwave, market prices climb to 18¢ per kWh, but their locked-in rate protects them. With 1,700 kWh of usage, their bill comes to about $238, while neighbors on variable-rate plans might pay closer to $306, depending on the terms of their contracts.

Now consider another homeowner whose electricity contract ends in late August, right when prices are at their seasonal peak. Instead of locking in a new fixed-rate plan at a higher rate, they decide to switch to a variable-rate plan for a month or two. As fall approaches and market prices drop, they then move to a fixed-rate plan with a lower rate per kWh. This short-term strategy helps them bridge the gap between contracts and secure better long-term savings once rates stabilize.

As mentioned previously, some plans in the market are fixed rate plans but with different incentives, plan structures, or perks. If you don’t think a “true” fixed-rate or variable-rate electricity plan is a good fit for your needs, explore these plan types:

• Time-of-Use Plans: Your provider sets specific “free usage” periods, such as nights or weekends. These plans can help you save if you can shift most of your electricity use into those windows. Keep in mind, though, that base charges and delivery fees still apply.
• Tiered Plans: Your kWh rate varies based on your electricity usage. For example, the first 1,000 kWh may be billed at one rate, and any amount above that is billed at a higher rate. These plans work best if your usage is consistent and stays within the lower tiers.
• Bill Credit Plans: Receive credits toward your monthly bill when your usage hits certain thresholds (varies by plan, but typically 1,000 or 2,000 kWh). This can lower bills for homes with higher electricity use, but may be less cost-effective for households that stay below the credit range.
• Solar Buyback Plans: These offer bill credits for the excess energy your home solar panels send back to the grid. They can be a great way to offset your energy costs and maximize the return on your solar investment.
• Green Energy Plans: These plans support renewable power by using Renewable Energy Certificates (RECs). A REC verifies that electricity equal to your usage was generated from renewable sources like wind or solar and added to the grid. The electricity flowing into your home still comes from the shared grid, but choosing a green plan helps support renewable energy initiatives.

Electricity rates rise and fall for many reasons, and understanding those reasons can help you see why your rates/prices change over time. Some of these factors are short-term, like seasonal demand spikes, while others are long-term, such as regulatory changes or economic conditions. The biggest rate factors include:

• Weather conditions: Extreme heat or cold drives higher usage as people rely more on heating and cooling.
• Seasonal demand: Prices tend to climb in summer and winter, while spring and fall often bring lower demand and lower rates.
• Fuel costs: Power plants rely on fuels such as natural gas and coal, and when the prices of these fuels rise, electricity costs also increase.
  Grid demand fluctuations: When the overall demand on the grid increases, rates can rise to balance the supply.
• Energy supply: Outages, reduced capacity, or shortages can limit supply and push prices higher.
• Regulatory changes: Policies, taxes, or compliance costs can increase provider expenses that are reflected in your bill.
• Competition: In deregulated markets, competition between providers can help lower rates.
• Transmission and distribution costs: These charges, known as TDU or TDSP fees, are regulated fees set by your electric utility company for delivering power to your home. They are updated a few times each year.
• Capacity charges: Utilities may charge more to ensure they can meet peak demand needs.
• Economic conditions and geopolitical events: Inflation, global conflicts, or disruptions in energy trade can cause ripple effects that influence local electricity prices.

Finding the right electricity plan isn’t just about picking the lowest rate; it’s about matching a plan to your usage habits, your budget, and your home. Before enrolling in a plan:

• Consider your location and market: In deregulated markets like Texas, you’ll find a wide variety of plans and providers competing for your business. Some states also set rules around cancellation fees or contract limits, so knowing your local market can help you avoid surprises.
• Assess your energy usage: Review your past bills to see how much electricity you typically use each month. Look for patterns, like higher usage in summer or winter, that might influence which plan works best.
• Compare electricity rates and plans: Research providers and look at the full range of plan types available in your area. Pay attention to rate structures, any perks or credits, and whether a plan is fixed, variable, or something else entirely.
• Review contract terms: Read the Electricity Facts Label (EFL) carefully before committing. Check the contract length, early termination clauses, hidden fees, and disclosures. These details can make a big difference in your overall costs.
• Seek expert support: If comparing plans feels overwhelming, consider using an energy broker or a trusted comparison service like Power Wizard. These tools can help you see the true cost of each plan and match you with the option that fits your household’s needs.

Choosing an electricity plan can seem complicated, but it doesn’t have to be. Whether you’re weighing the stability of a fixed-rate plan or the flexibility of a variable-rate plan, the key is understanding the true cost behind each option.

Power Wizard takes the guesswork out of the process. Instead of spending hours comparing providers and trying to decode fine print, you can use our tool to see plans side by side, with all the fees, perks, and contract details included. That way, you know exactly what you’re paying for—no tricks, no surprises. Enter your ZIP code into our smart comparison tool to get started.