Do you like to shop around for the lowest possible price? Are you willing to take the occasional risk? If so, a floating rate plan may be the ideal energy plan for you.
Floating rate plans charge energy prices based upon current market conditions for electricity and natural gas.
When you sign up for a floating rate electricity or natural gas plan, you will not pay a fixed rate for the energy you use. Instead, the price you pay will be based upon how much electricity or natural gas currently costs.
Obviously, floating rate plans don’t just allow a provider to make up whatever price sounds good to them, but instead, calculates the monthly rate based upon the current market price for energy. For example, in Ontario, RiteRate offers a floating rate plan that takes the monthly average of the Hourly Ontario Energy Price (HOEP) for a kilowatt-hour (kWh) of electricity, and adds between 1 and 1.2 cents to that rate, producing the retail rate they charge customers.
For example, if the April HOEP price is 2.8 cents per kWh, and your business uses 1,000 kWh of electricity, here is how your April electricity cost will be calculated (we’ll assume that you’re on their 1 year plan, which adds 1.2 cents per kWh to the HOEP price):
(1.8 cents/kWh + 1.2 cents/kWh) * 1,000 kWh = 3,000 cents, or $30.00
(Please note, this calculation doesn’t include other fees and surcharges.)
But remember: The energy prices charged by floating rate plans change every month.
As we mentioned, floating rate plans calculate the cost of electricity or natural gas based upon the current market price of energy. That means that when demand rises or an outside event—such as a natural disaster or a trade conflict—occurs, the price of energy will rise, and so the price charged by your floating rate plan will rise as well.
For instance, in the hypothetical scenario we described above, the price you paid in April was 3 cents per kWh (the HOEP price of 1.8 cents, plus RiteRate’s margin of 1.2 cents). Now imagine that in May, the demand for electricity in Ontario rises, and a flood shuts down a major electricity generation plant. Due to these two factors, the HOEP price jumps up to 3.9 cents per kWh.
If you use the same amount of electricity (1,000 kWh) that you used in April, our May electricity cost will be:
(3.9 cents/kWh + 1.2 cents/kWh) * 1,000 kWh = 5,100 cents, or $51.00
Despite the fact that you used the exact same amount of electricity in May that you used in April, your bill will have jumped from $30 to $51 in the space of a single month, an increase of 70%. For a home on a tight budget, this could be a very unpleasant surprise.
So what are the benefits of a floating rate plan?
Typically, floating rate plans almost always offer lower rates than other types of plans.
If you directly compare the prices offered by floating rate plans versus fixed rate plans—our handy energy rate comparison form can help you do just that—chances are that the floating rate plans will be much more inexpensive than other options. That’s because floating rate plans are based upon conditions as they are right now, while other types of plans hedge against the future. When prices rise, a company can adjust the floating rate they charge you, but if you sign a fixed rate plan, they’re contractually obligated to preserve that rate for you.
If you’re willing to take a risk, a floating rate plan is a good way to get the best possible rate right now, and if you’re lucky, you may continue to pay rates that are lower than other options. But on the other hand, you may end up being blindsided by sudden price hikes.
If your first priority is having an energy plan with a rate that is stable and predictable, then a variable rate plan is probably not your best option.