Fixed vs. Variable Electricity Rates: Your 2024 Guide

If your business operates in a deregulated electricity market, you have a choice that many don't: you can select your own energy supplier and choose between fixed and variable rate plans. While this freedom is a genuine advantage, it also adds complexity to your decision-making process.

Understanding the difference between these two rate structures—and knowing which aligns with your business needs—can significantly impact your bottom line and your ability to forecast costs accurately.

What's the Difference?

Fixed rate plans lock in a specific electricity rate for the duration of your contract, typically ranging from one to three years or longer. Regardless of market conditions, your per-kilowatt-hour cost remains the same from the first day to the last.

Variable rate plans tie your electricity cost to the current wholesale market price. Your rate fluctuates based on supply and demand, seasonal patterns, and other market factors. You might pay less during low-demand periods and more during peak times.

The trade-off is straightforward: stability versus potential savings.

Fixed Rates: Predictability and Peace of Mind

The primary benefit of a fixed rate plan is budgeting certainty. You know exactly what you'll pay for electricity each month, making it easier to forecast operating costs and set prices for your products or services.

Fixed rates also protect you from sudden spikes in wholesale electricity prices. If market conditions cause energy costs to surge, your rate remains unchanged. This protection has real value, especially for businesses with tight profit margins or those in industries where energy represents a significant operating expense.

However, this protection comes at a cost. Suppliers build in a margin to cover their risk when they lock in a rate. If the market moves in your favor—if wholesale prices drop—you won't benefit. You'll still pay the locked-in rate while other businesses enjoy lower costs.

Fixed plans also typically include early termination penalties if you need to exit the contract before it expires. This can be expensive, so it's important to commit only to a contract length that matches your business stability.

Variable Rates: Flexibility with Risk

Variable rate plans appeal to businesses willing to accept rate uncertainty in exchange for the potential to pay less. During periods when wholesale electricity prices are low, variable-rate customers enjoy corresponding savings.

Variable plans also offer flexibility. Most don't include steep early termination fees, allowing you to switch suppliers or plan types if your needs change or if better opportunities emerge.

The downside is volatility. Your electricity bill can change significantly from month to month, making it harder to predict annual costs and plan budgets. In periods of high demand or supply constraints, your costs could spike substantially. For businesses operating on thin margins, this unpredictability can be problematic.

Variable rates work best for companies with strong cash reserves, flexible pricing models, or those in industries where energy costs don't significantly impact profitability.

Which Should You Choose?

Your decision depends on several factors specific to your situation.

Consider a fixed rate if:

• You need stable, predictable monthly costs
• Your business operates on tight margins
• You're uncomfortable with financial uncertainty
• You plan to stay at your current location and with your current supplier for several years
• Your industry doesn't allow you to pass energy cost increases to customers

Consider a variable rate if:

• You have sufficient cash reserves to handle monthly fluctuations
• Your business model allows you to adjust pricing based on costs
• You want to capitalize on potential savings during low-price periods
• You may need operational flexibility to change suppliers
• You're comfortable monitoring market conditions and adjusting your strategy

The Timing Factor

When you sign up matters too. If you're locking in a fixed rate during a period of historically high wholesale prices, you might lock in an unfavorable rate. Conversely, signing a variable contract just before a major price increase could hurt your bottom line.

Neither you nor your energy consultant can predict market movements with certainty, but understanding market trends and your contract renewal timeline helps you make more informed decisions.

Take Action

Your electricity contract is one of the easiest operating costs to optimize—yet many businesses leave significant savings on the table simply because they haven't reviewed their options. The right plan depends on your cash flow, risk tolerance, and business model.

If you're unsure which approach makes sense for your company, or if you want to review your current contract and explore alternatives, we're here to help. Reach out to Soto Advisory Solutions to discuss your electricity strategy and see how we can help you reduce energy costs while managing risk appropriately.