What’s the Difference Between a Fixed, Variable, and Market-Capped Electricity Rate?
When it comes to navigating a deregulated energy market and choosing an energy supplier, rate options can begin to feel like a nightmare. But slow down, take a deep breath, and you will find it is easier than it appears. Over the nearly 20 years the energy market has been deregulated in New York, Energy Service Companies, commonly known as ESCo’s, have created three standard ways to charge their customers: Variable, Fixed, and Market Capped Rates. Each of these rate classes has its advantages and disadvantages, and it is important that every consumer knows the differences to make the best possible choice. A helpful guide follows below:
In states with deregulated energy markets, energy is sold on a commodity market where prices shift minute to minute based on the supply and demand for energy in a given service area. For Example, in the State of New York, the energy market is called the “New York Independent System Operator,” or NYISO, and the service area of New York City is “Zone J.” All energy companies purchase energy off the commodity market, and then determine how to charge the end customer for it.
When an energy company offers you a variable rate, the company is offering you electricity prices that change with the market. Every month, the rate you pay changes based on how the market performed. Energy companies then make their profit by adding a small mark up to the price they purchased it from on the commodity market. Consumers often value fixed rates because they ensure equity and fairness with your neighbors since you have peace of mind that you are paying the market rate, but they have some risk since they can be subject to variability in monthly rates.
A fixed rate is fundamentally different from a variable rate because you pay the same rate every month. While energy markets are subject to heavy fluctuations, ESCo’s have figured out how to offer clients consistent prices by making estimates about how much electricity will cost in the future and averaging out rates in advance. Consumers love fixed rates because it allows clients to comparison shop for the best deal, have stability in their monthly spending on energy, and feel comfortable in the product’s transparency. The risk, however, is that since nobody can perfectly predict the future, you might end up spending more on electricity than you would with a variable rate. If energy prices rise above your rate, it means you made a great choice. But if prices fall below the fixed rate, you might be stuck overpaying on energy.
Market Capped Rates:
The final commonly seen rate class is a market-capped rate, which combines the best aspects of both variable and fixed rates. Under a market capped rate, you pay a variable rate throughout the year, but a cap is placed on the highest price you can pay during specific months. For example, since energy prices tend to be high during the summer and winter, but low during the spring and fall, a company might place a price ceiling on your risk during the winter and summer months to ensure your rates do not spike above a certain price, but remove the ceiling during lower risk months.
Energy Service Companies are capable of offering market-capped rates by purchasing energy in advance of when it is needed, and placing a “hedge” against the risk. Many choose market-capped rates because they offer a nice blend between the stability of a fixed rate and the equity of a variable rate, but be careful because sometimes these rates can lack transparency and be difficult to interpret.
What Should You Choose?
So where does this leave us? What rate should we choose? Which rate is best for you? The truth of the matter is, nobody knows for sure. Every rate class has its advantages and disadvantages, and the best choice depends on the qualities you value. A variable rate can be volatile and unpredictable, but offers fairness because customers know their price is changing with the market, and equitable since your neighbor’s rates change the same way. Fixed rates offer stability and the ability to shop around, but uncertainty since rates might go down while you are locked into a contract. And Market Capped Rates offer a mix of equity and stability, but can often lack transparency. The truth is, only you can decide, but if you need some help, many are there for assistance. For more guidance on what might be the best rate for you, give a Phoenix Energy Rep a call at (646) 723-4590. We hope to hear from you soon!