Electricity rate types in Texas can be roughly categorized into 3 types: Variable rate, Fixed rate, and indexed rate electricity plans. As the name implies, the price on variable rate plans can change. Typically, these rates will update each month.
For most residential electricity customers, fixed rate plans are preferable to variable rate plans. Even though fixed rate plans can themselves be unpredictable sometimes, they offer more price stability and less risk than variable rate plans.
When you enroll with a fixed term contract with an electricity provider you are locking in a rate for the length of that term. The term lengths may be 3 months, 12 months or anywhere up to 60 months.
Here is an example of how variable rate plans are sometimes priced
This Electricity Fact Label (EFL) is from a variable rate plan offered by Infuse Energy.
Variable Rate Plans Often contain the following components
Provider Energy Charge
This is a per kWh charge for the electricity you use. For example, a plan may have a 9.5¢ per kWh charge. Because the rate is variable, the provider can change this rate at any time. Though they typically update these rates monthly.
Provider Base Monthly Charge
This is a fixed dollar amount that is included in your bill each month regardless of how much or how little electricity you use. It’s sometimes called a monthly subscription fee. It is also sometimes called a billing fee or service charge.
TDU flat delivery charge
This is a fixed dollar amount that is charged to every home address that receives electricity in Texas deregulated markets. This fee goes to the transmission utility that is responsible for maintaining the power lines and delivering power to your address. Read more about TDUs and their fees here.
TDU per kWh charge
This is a per kWh delivery charge from the TDU. Common practice is for the retail electricity provider you are using to simply pass this fee along to you. The TDU flat and per kWh delivery charges are considered pass-through fees. There is no way to avoid them regardless of what plan you have or what electricity provider you use.
Minimum Usage Fee
If you don’t use a minimum amount of electricity you can be charged this fee.
Benefits of a variable rate electricity plan
Variable rate plans do give you flexibility. You can switch providers with no cancelation fee. They may be the best option if you only plan to be at an address for a short time.
But, in reality, there are very few benefits to choosing a variable rate plan. Depending on market conditions, variable rate plans can sometimes be cheaper than fixed rate plans. But this isn’t the normal situation. And when it does occur, it can be short lived. Once electricity rates go up you will be stuck with the higher price. If you do choose to switch to a fixed rate plan at that point it will probably be at a higher rate than you could have received initially.
Who uses variable rate electricity plans?
Most Texans who shop for an electricity provider enroll in 12 month plans that have a fixed rate. Though these term lengths can be anything up to 60 months. When the term of your plan expires, the electric company you are with will usually contact you to try to enroll you in another plan. If you don’t enroll in a new plan, you will still get electricity but you will usually be moved to a variable rate plan. In most cases the price on the variable rate plan will be higher than you were paying before.
Some people may choose to bypass enrolling in a 12 month plan and just enroll directly into a variable rate plan. Perhaps they are only going to be at the address for a short time. Or perhaps they are gambling that electricity rates are going to fall, and they will be able to lock in a lower fixed rate plan if they wait a while.
What are the alternatives to variable rate electricity plans?
Fixed rate electricity plans are usually a better alternative. Indexed rates are another alternative. But indexed rates are inappropriate for most residential customers.
Sometimes the advertised rates for variable electricity rate plans are lower than rates for fixed electricity rate plans. It may be tempting to go with that cheaper rate. But understand that you are taking a gamble. Electricity rates in Texas change often. If you are enrolled in a variable rate plan, you have no protection against a sudden spike in your electricity bills if wholesale electricity rates go up.
Those who enrolled in fixed rate electricity plans are protected against the short-term movements of the wholesale electricity market. But those with variable rate plans can find themselves opening their energy bill to a nasty surprise one month.
What electric company has the cheapest variable rate electricity plans?
Of the 60 or so electricity providers that regularly list plans on the state’s Power To Choose website, only about 8 or 9 list variable rate plans currently.
Newer Texas electric companies are more likely to advertise cheap variable rate electricity plans. Many companies use teaser rates as a way to grab attention and attract new customers. You must understand that these seemly affordable electricity rates may be short lived. In the long run you are better off finding a longer-term fixed price plan
Are variable rate electricity plans cheaper than fixed rate plans?
In the short-term variable rate electricity plans are sometimes cheaper than fixed rate electricity plans. However, in the long term they are seldom cheaper. Electric companies prefer to lock their customers into longer term contracts. This makes it easier to predict how much power they will need to buy from the wholesale markets to supply their customers. This allows them to enter into longer term purchase agreements and better hedge themselves against unexpected events in the wholesale market. If you enroll in a variable rate plan, you are taking on much of that risk yourself.
Cancelation fees on variable rate electricity plans
Because there is usually no fixed length commitment with a variable rate electricity plan, there is typically not a cancelation fee if you want to enroll in a different plan or switch providers.