What is a fixed-rate energy plan?

Direct Energy, September 21, 2023

4 minute read

What is a fixed-rate energy plan?

Direct Energy, September 21, 2023

4 minute read

If you’ve wondered what fixed-rate energy or fixed-rate electricity is, this helpful explainer breaks it down and helps you determine if a fixed-rate plan is right for you. A fixed-rate energy plan is pretty much exactly what it sounds like – you lock in a rate for electricity or natural gas for a set period. Many energy companies offer plans for a wide range of contract term lengths, though the most common ones are 6, 12 and 24 months.

Photo of a couple sitting at a laptop looking at the sceen
Photo of a couple sitting at a laptop looking at the sceen
Photo of a couple sitting at a laptop looking at the sceen

What is the benefit of a fixed-rate plan?

When comparing the rates across plans, you may find the rates are slightly higher or even lower than what is currently offered by the variable-rate plan (which has a rate that varies with each billing cycle). But when you sign up for a fixed-rate energy plan, you don't carry the risk of prices skyrocketing when the seasons change.

What is the risk of a fixed-rate plan?

If you enroll in a fixed-rate energy plan and rates then become much lower for an extended period, you risk missing out on lower prices from a downturn in the energy market.

What protection does a fixed-rate plan provide?

Energy market fluctuations are similar to buying gas for your car. Fuel prices change daily and from one neighborhood to another, making it difficult to budget accurately.

The same is true with natural gas and electricity. Natural gas is a commodity that is traded on the market, which means it experiences regular price fluctuations based on consumer demand. To see how natural gas prices have risen and fallen over the years, visit the U.S. Energy Information Administration website.

Electricity prices can also fluctuate, depending on a variety of factors including fuel costs to generate electricity, weather, the distribution system and demand.

Much like the fluctuating cost of a gallon of gas for your car, these shifting rates can leave you feeling uncertain about your monthly energy costs. And when you add seasonal elements into the mix, like winter weather with peak natural gas prices, you can end up paying more than you'd expected. 

When you choose a fixed-rate energy plan, you're hedging against the day-to-day swings of the energy market so you can better manage your energy costs and have peace of mind.

Is a fixed-rate energy plan right for you?

If you're thinking about a fixed-rate plan, here are a few things to consider:

  • If you live in a part of the country with lots of seasonal weather variation, a fixed rate can help you make a reasonable projection on how much you are going to spend.
  • If you're living on a fixed income or a tight budget, and a big jump in energy prices would make running your air conditioner unaffordable, a fixed-rate energy plan might offer the price protection you need to stay cool when it's hot outside.
  • If you live in a more temperate part of the country and your energy usage is roughly the same month-to-month, a fixed-rate plan would make your budget more predictable while simultaneously protecting you from changes in the market. 

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