The fundamental difference
When you choose an electricity supplier, one of the first decisions is whether to go with a fixed-rate or variable-rate plan. The distinction is straightforward:
Fixed-rate plans lock in your generation rate for a set contract term (typically 6, 12, or 24 months). If you sign up at 10¢/kWh, you pay 10¢/kWh every month until the contract ends, regardless of what happens in the wholesale market.
Variable-rate plans adjust your rate monthly based on market conditions. Your rate might be 9¢/kWh one month and 11¢/kWh the next, tracking wholesale price movements.
Neither type is inherently better. The right choice depends on your risk tolerance, how long you'll stay at your current address, and what's happening in wholesale electricity markets.
When fixed makes sense
In a rising rate environment
If wholesale electricity prices are climbing — due to fuel costs, capacity constraints, regulatory changes, or other factors — locking in a fixed rate protects you from those increases. You pay today's rate even as market rates rise.
The trade-off: you're paying a premium for that certainty. Fixed rates are typically higher than current variable rates because suppliers build in a margin to cover their risk.
When budget predictability matters
Some households value knowing exactly what their electricity rate will be. Fixed-rate plans make budgeting easier — your rate stays constant even if your usage varies. This is particularly valuable for households on tight budgets or fixed incomes.
For longer stays
If you'll be at your current address for a year or more, a fixed-rate plan lets you lock in stability for that period. The longer your term, the more protection you get from market volatility.
Conversely, if you might move in six months, a 24-month fixed contract with an early termination fee doesn't make sense.
When you don't want to monitor markets
Variable rates reward attention — you can switch when rates spike. Fixed rates are “set it and forget it.” If you don't want to track electricity prices, fixed rates let you lock in a rate and move on with your life.
➤Compare fixed-rate plans in your areaWhen variable makes sense
In a falling rate environment
If wholesale prices are declining, variable rates let you benefit from those drops. You're not locked into a higher fixed rate negotiated when prices were elevated.
The risk: if prices reverse and climb, so does your rate. Variable exposes you to both the upside and downside.
For short-term residents
If you're renting month-to-month, expect to move soon, or simply don't know how long you'll stay, variable rates offer flexibility. There's no contract locking you in and usually no early termination fee.
When you want flexibility
Variable plans typically have no long-term commitment. You can switch to a better offer whenever you find one. If a competitor launches a promotion or your utility's default rate drops, you can move without penalty.
For engaged shoppers
If you're willing to monitor rates and switch when conditions warrant, variable plans let you optimize. You might ride a variable rate down during favorable periods, then lock in a fixed rate when it looks like prices will rise.
The hybrid options
The fixed vs. variable choice isn't always binary. Several hybrid structures exist:
Introductory fixed that rolls to variable
Some plans offer a low fixed rate for 1-3 months, then convert to variable pricing. The introductory rate attracts customers; the variable tail is where the supplier makes margin. Read the full terms to understand what rate you'll pay after the intro period.
Fixed with renewal to variable
Many fixed-rate contracts convert to month-to-month variable pricing when the initial term ends. If you don't actively renew or switch, you're suddenly on a variable rate that may be higher than what you'd find by shopping.
Indexed rates
Some plans track a published wholesale index (like the PJM day-ahead price) plus a fixed margin. Your rate varies with the market, but the margin is transparent. These are more common in commercial than residential markets.
Tiered structures
A few plans offer fixed rates up to a certain usage threshold, with excess usage priced differently. For example, 10¢/kWh for the first 1,000 kWh, 12¢/kWh above that. These are relatively rare in residential markets.
How rates are actually set
Understanding how suppliers set rates helps explain why fixed and variable behave differently.
Wholesale market exposure
Electricity suppliers don't generate power themselves (usually). They buy wholesale electricity from generators or on spot markets, then resell it to you at retail rates. Their profit is the spread between wholesale cost and retail price.
Wholesale prices fluctuate constantly based on fuel costs, demand, weather, plant outages, transmission constraints, and more. A supplier offering a variable rate passes much of that volatility through to you.
Supplier hedging
When a supplier offers a fixed rate, they're taking on price risk. If wholesale prices spike, they still owe you the fixed rate. To manage this risk, suppliers hedge — they lock in forward contracts for some portion of the power they'll need to serve fixed-rate customers.
The cost of hedging gets built into fixed rates. That's why fixed rates are typically higher than current variable rates — you're paying for the insurance against price increases.
Retail markup
On top of wholesale costs (and hedging costs for fixed plans), suppliers add a margin for operating expenses and profit. This margin varies by supplier and plan. Competitive markets keep margins somewhat in check, but they're not zero.
➤See current rates from multiple suppliersMath comparison at average usage
Let's put numbers to this. Assume average household usage of 1,000 kWh per month.
Scenario 1: Stable market
Fixed rate: 11¢/kWh for 12 months
Variable rate: 10¢/kWh now, stays around 10¢ all year
Annual cost with fixed: 12,000 kWh × $0.11 = $1,320
Annual cost with variable: 12,000 kWh × $0.10 = $1,200
In a stable market where prices don't move much, the variable rate wins by $120/year because you're not paying for hedging.
Scenario 2: Rising market
Fixed rate: 11¢/kWh for 12 months
Variable rate: starts at 10¢, rises to 14¢ by summer, averages 12¢ over the year
Annual cost with fixed: 12,000 kWh × $0.11 = $1,320
Annual cost with variable: 12,000 kWh × $0.12 = $1,440
In a rising market, the fixed rate wins by $120/year. You locked in below what variable customers ended up paying.
Scenario 3: Falling market
Fixed rate: 11¢/kWh for 12 months
Variable rate: starts at 10¢, drops to 8¢, averages 9¢ over the year
Annual cost with fixed: 12,000 kWh × $0.11 = $1,320
Annual cost with variable: 12,000 kWh × $0.09 = $1,080
In a falling market, variable wins by $240/year. You benefited from declining prices while fixed-rate customers stayed at their locked-in rate.
The takeaway
No one knows for certain which way the market will go. Fixed rates are insurance — you pay a premium for protection against increases. Variable rates are a bet that prices will stay flat or fall. Your risk tolerance determines which makes sense.
Frequently asked questions
Is a fixed or variable electricity rate better?
Neither is universally better — it depends on your situation. Fixed rates provide budget predictability and protection from price spikes. Variable rates offer flexibility and can be cheaper when wholesale prices fall. Consider your risk tolerance, how long you'll stay, and current market conditions.
Can variable electricity rates go down?
Yes. Variable rates track wholesale markets, which fluctuate up and down. When wholesale prices drop, variable rates typically follow. The flip side is they also rise when wholesale prices increase.
What happens when my fixed-rate contract ends?
It depends on your contract terms. Some plans auto-renew at a new fixed rate (often higher). Some convert to variable pricing. Some return you to your utility's default rate. Check your contract and shop for a new plan before expiration.
Do fixed-rate plans have early termination fees?
Many do, though not all. ETFs typically range from $50 to $200 or more. Some fixed-rate plans have no ETF. Check the contract terms before enrolling, especially if you might move or want flexibility.
What is a hybrid electricity rate?
Hybrid plans combine fixed and variable elements. Examples include introductory fixed rates that convert to variable after a period, tiered rates where a portion is fixed and excess usage is variable, or indexed rates that track wholesale prices plus a fixed margin.
