Fixed vs Variable Commercial Electricity Rates
Choosing the right rate structure is one of the most important decisions for your business. The right choice depends on your risk tolerance, budget requirements, and market outlook.
Fixed Rate
Same rate every month for the contract term. Budget certainty with no surprises.
Variable Rate
Rate changes monthly with market prices. Potential savings but also risk.
Understanding Fixed Rates
With a fixed-rate plan, your supply rate per kWh is locked in for the entire contract term—typically 12, 24, or 36 months. Whether wholesale electricity prices double or drop in half, your rate stays the same.
Advantages
- Budget certainty - Know your costs in advance
- Protection from spikes - Immune to market volatility
- Easier forecasting - Predictable expense line item
- No monitoring needed - Set it and forget it
- Stakeholder confidence - Reliable projections for investors
Disadvantages
- Miss savings - Can't benefit if prices drop
- Risk premium - Typically higher than current market
- Early termination fees - Costly to exit early
- Less flexibility - Locked in for contract term
- Timing risk - May lock in at a market peak
How Fixed Rates Are Priced
Suppliers set fixed rates based on forward electricity prices plus a risk premium. If the market expects prices to rise, fixed rates will be higher to protect the supplier. The longer the term, the higher the premium for extended price protection.
Understanding Variable Rates
Variable-rate plans adjust monthly based on wholesale market conditions. Your rate might be tied to an index like the day-ahead market price, or it may be set monthly by your supplier based on their wholesale costs.
Advantages
- Potential savings - Benefit when market drops
- No risk premium - Pay closer to actual cost
- Flexibility - Usually no long-term contract
- Easy to switch - Change suppliers anytime
- Market exposure - Good if you expect falling prices
Disadvantages
- Price spikes - Exposed to market volatility
- Budget uncertainty - Hard to forecast costs
- Winter/summer risk - Extreme weather = high prices
- Requires monitoring - Must watch market conditions
- Cash flow risk - Unexpected high bills possible
Real World Example
During the February 2021 Texas freeze, wholesale electricity prices spiked to $9,000/MWh (vs normal $50/MWh). Businesses on variable rates saw bills increase 10-20x that month. A business using 50,000 kWh could have faced a $45,000 surprise vs their normal $2,500 bill.
Head-to-Head Comparison
| Factor | Fixed Rate | Variable Rate |
|---|---|---|
| Budget Predictability | Excellent - same rate monthly | Poor - changes each month |
| Potential Savings | Limited - locked in | High - if market drops |
| Price Spike Protection | Full protection | No protection |
| Contract Flexibility | Locked 12-36 months | Month-to-month typical |
| Early Exit Cost | Termination fees apply | Usually none |
| Management Effort | Set and forget | Ongoing monitoring |
Which Rate Type Fits Your Business?
Fixed Rates Best For
High usage means price swings significantly impact bottom line
Strict budgets and critical operations require cost stability
Multiple locations need predictable operating costs
Variable Rates Best For
Low usage means price swings have minimal impact
Need flexibility to scale up/down without contract penalties
Have expertise to monitor markets and manage risk
Hybrid Rate Structures
Don't want to choose? Hybrid plans combine elements of both fixed and variable rates to balance protection with potential savings.
Block + Index
Fix a portion of your expected usage (e.g., 70%) at a locked rate. The remainder floats with market prices.
Collar/Band
Variable rate with floor and ceiling limits. Rate floats within a band—you're protected from extremes.
Layered Fixed
Multiple fixed contracts with staggered terms. Reduces timing risk by averaging lock-in prices over time.
Decision Framework: 5 Questions to Ask
If you need precise forecasting for stakeholders or tight margins, lean fixed.
High usage (100,000+ kWh) means bigger impact from price swings—consider fixed.
If a 2-3x bill would strain operations, fixed provides peace of mind.
Rising prices favor locking in now. Falling prices favor waiting or going variable.
Active monitoring required for variable. Fixed is "set it and forget it."
Frequently Asked Questions
What is a fixed-rate commercial electricity plan?
A fixed-rate commercial electricity plan locks in your per-kWh supply rate for the contract term, typically 12-36 months. Your rate stays the same regardless of market fluctuations, providing budget certainty. However, you won't benefit if market prices drop significantly.
What is a variable-rate commercial electricity plan?
A variable-rate plan has a supply rate that changes monthly based on wholesale electricity market prices. You may pay less when market prices are low but will pay more when prices spike. Variable plans typically have no long-term contract, allowing flexibility to switch.
Which businesses should choose fixed rates?
Fixed rates are ideal for businesses with tight budgets requiring predictable expenses, high electricity usage where price swings could be costly, risk-averse management preferences, and those planning major projects where cost certainty is important. Manufacturing, healthcare, and large retail operations often prefer fixed rates.
Which businesses should choose variable rates?
Variable rates work well for businesses with flexible budgets that can absorb price fluctuations, seasonal operations that need short-term flexibility, sophisticated energy management with hedging capabilities, and those confident in declining market conditions. Small offices and businesses with low usage may also benefit from variable rate flexibility.
What is a hybrid or blended rate structure?
A hybrid rate structure combines fixed and variable components. For example, you might fix 70% of your expected usage at a locked rate and let 30% float with market prices. This provides partial budget protection while allowing some exposure to potentially lower market rates. Block and index plans are common hybrid structures.
Not Sure Which Rate Structure to Choose?
Our commercial energy consultants can analyze your usage patterns, risk tolerance, and market conditions to recommend the best rate structure for your business.
Get Expert Rate Guidance