Are Variable Electric Rates Lower Than Fixed Rates?
The short answer is ‘YES’ once we look at the data over the last seven years. But first, let’s define the offerings. A variable rate is when the third-party supplier offers electricity prices that change with the market. Every month, the rate changes based on how the market performed. There is a wide spectrum of variable offerings ranging from fixing an 'Adder' that houses all other non-energy costs required to serve retail electricity to a ‘full’ variable with no fixed elements. The risk is that the rate can be subject to wide market variations. The differences were significant during the winter months in New England between the years of 2010 and 2015 that resulted in frustration among most consumers.
A fixed-rate is fundamentally different from a variable rate because it is the same rate every month over a specified term. It is a desirable offering by most consumers because it allows them to ‘comparison shop’ for the best deal, have stability in the monthly spend, and have transparency in the rates. The risk, however, is one might spend more on electricity than with a variable rate. Fixed rates are a great choice if energy prices rise but consumers will pay a premium if energy prices fall.
At Neighborhood Energy, we advocated fixed rates because it gives budget certainty and outperformed variable rates in 2010 through 2015. However, the growth of shale natural gas, the increased capacity of liquefied natural gas coupled with milder winters has reversed the trend. Calculations show that the difference, on average, since 2013 is that variable rates have outperformed fixed rates by approximately $0.01/kWh.
What rate is best? It depends on one’s appetite for risk. A variable-rate can be volatile and unpredictable but offers fairness because customers know the price changes with the market and the variable rate has outperformed fixed rates in the past 7 years. It is important to note however that past performance does not imply future performance. Fixed rates offer stability and the ability to shop around, but uncertainty since the market might go down while committed to a contract.
For more guidance on what option is the best for you, give your friendly Neighborhood Energy a call (888) 486-5174 or email tad@neighborhoodenergyne.com.