Do you tend to hold off on making major purchases in the hope—or belief—that in a few weeks or months the price would drop significantly, saving you money? If so, then a variable rate electricity or natural gas plan might be right for you.
Variable rate plans charge you according to how much energy currently costs.
When you sign a variable rate plan, you aren’t agreeing to pay a single fixed rate for your energy. Instead, you are agreeing to pay whatever your energy provider determines to be a fair price based upon current market conditions.
Usually, variable rate plans don’t allow energy providers to just make up whatever price they like (that sounds a bit dodgy, doesn’t it?). Instead, the contract usually specifies a connection between the current market price, and the price charged by your provider. For instance, in Alberta, ATCOenergy has a variable rate plan that calculates the price charged to consumers by taking the current Alberta wholesale price for a kilowatt-hour (kWh) of electricity, and adding 1 cent to it.
So, if the average market price for electricity in June is 2.9 cents per kWh, and you use 1,000 kWh of electricity that month, your total electricity cost will be calculated thusly:
(2.9 cents/kWh + 1 cent/kWh) * 1,000 kWh = 3,900 cents, or $39.00
It’s important to understand that the price charged by variable rate plans changes month to month.
For consumers considering signing a contract for a variable rate energy plan, it’s necessary to point out that what you pay this month will not be what you pay next month. Local changes in energy demand, as well as outside influences such as natural disasters and the state of world markets, can result in rapid rises and falls in the price of electricity and natural gas.
In our example above, the Alberta market price of electricity was 2.9 cents per kWh in the month of June, resulting in an ATCO price of 3.9 cents per kWh. Suppose that in July, electricity demand rises sharply, and an accident forces the temporary closure of a nuclear-powered electricity generation plant. As a consequence, July’s market price jumps to 6.7 cents per kWh.
If our hypothetical ATCO customer uses the same amount of electricity that they used in June, their total electricity cost would be:
(6.7 cents/kWh + 1 cent/kWh) * 1,000 kWh = 7,700 cents, or $77.00
Despite using the exact same amount of electricity that they used the previous month, this customer sees their monthly electricity bill jump from $39 to $77, an increase of 97.4%. For a household on a tight budget, this can be a scary thing to contemplate. Why would anyone risk this?
The benefit of variable rate plans is that they’re almost always cheaper than other offerings.
If you compare the price of fixed rate plans versus variable rate plans—use our convenient energy rate comparison form above to view the plans currently available in your area—you’ll find that the current variable rates on offer are less expensive than the fixed rates. That’s because the latter essentially functions as a hedge against the future. Variable rates are based upon how things are now.
If your motivation is to get the lowest possible rate, then a variable rate plan is likely the right choice for you. It is a calculated risk, and you will have to be careful in your budgeting, but you will likely save money in the long run, even if your rates occasionally spike.
If you favor predictability and stability, then variable rate energy plans probably aren’t ideal for you.