Fixed vs. Variable Third-Party Energy Rates: Which is Right for You?
Before deciding on a Third-Party energy rate plan for your business, understanding the differences between Fixed and Variable third-party energy rates is important. Both options have distinct features that can impact your budget and overall financial strategy. Let's explore the key aspects of each to help you make an informed choice.
What is a Fixed Third-Party Energy Rate?
A Fixed third-party energy rate offers stability by maintaining a consistent price per kilowatt-hour (kWh) or price per therm throughout the duration of your contract. This means that regardless of market fluctuations, your energy rate remains unchanged. This predictability simplifies budgeting and shields you from sudden increases in energy costs due to market volatility.
Benefits of Fixed Third-Party Energy Rates:
Budget Certainty: With a fixed-rate plan, you can accurately forecast your monthly energy expenses, making financial planning easier.
Protection from Price Spikes: You are insulated from potential price hikes in the energy market, providing financial stability.
Short & Long-Term Planning: Ideal for businesses that prefer stable, predictable costs.
Considerations of Fixed Third-Party Energy Rates:
Potential for Higher Costs: If market prices drop significantly below your fixed rate, you might miss out on potential savings.
Contract Commitments: Typically involves signing a contract that can range from 3 months to 5+ years.
What is a Variable Third-Party Energy Rate?
Unlike Fixed third-party rates, Variable third-Party Energy rates fluctuate based on market conditions. The price per kWh can change monthly or even more frequently, depending on factors such as supply and demand, fuel prices, and environmental conditions.
Benefits of Variable Third-Party Energy Rates:
Potential Savings: When market prices for energy decrease, you can benefit from lower electricity costs.
Short-Term Advantage: Suitable for businesses with fluctuating energy needs or seasonal operations.
Considerations of Variable Third-Party Energy Rates:
Price Volatility: Monthly bills can vary widely, making budgeting and financial planning more challenging.
Risk of Price Spikes: You may face higher costs during periods of increased energy demand or market instability.
Why Suppliers Can Offer Fixed Rates and Utilities Cannot
Suppliers like Constellation, First Point Power & NRG can offer fixed rates because they purchase energy in bulk on the wholesale market and use financial instruments to hedge against price fluctuations, allowing them to lock in prices over a specified period. This flexibility and competitive market environment enable suppliers to design various rate plans tailored to customer needs.
In contrast, utilities like Eversource & National Grid are regulated by state public utility commissions, which oversee their pricing structures and limit their ability to offer fixed-rate plans. Utilities recover their costs through rate adjustments that reflect actual service costs, making it challenging to provide fixed rates.
Why Neighborhood Energy Recommends Fixed-Rates
At Neighborhood Energy, we understand the highly elastic nature of the natural gas market. Due to pricing volatility in New England caused by pipeline constraints, sensitivity to geopolitical events, and the region’s reliance on liquefied natural gas during the winter, most of our clients prefer fixed third-party rate plans. Fixed rates offer budget certainty and peace of mind, which are key drivers for our clients.
Choosing the Right Plan for You
The decision between fixed and variable-rate energy plans depends on your risk tolerance, budgeting preferences, and energy consumption patterns. If you prioritize stability and predictability in your budget, a fixed-rate option from suppliers may be the better option. Conversely, if you’re comfortable with some uncertainty and wish to capitalize on potential savings during market downturns, a variable-rate plan could be more suitable.
Conclusion
Navigating energy rate options can be complex, but understanding the nuances between fixed and variable plans is important to making an informed decision. Whether you opt for the stability of a fixed rate or the potential savings of a variable rate, evaluating your specific business needs and market conditions is important. For personalized guidance on selecting the right energy plan, contact a Neighborhood Energy representative today for more information. Take control of your energy costs and future with confidence.