What are the basics of a variable-rate energy plan?

A variable-rate energy plan means the rate you pay for your electricity or natural gas supply may fluctuate monthly. This monthly rate will be based on the current market prices that your energy supplier pays to obtain the natural gas and electricity it sells to you. Variable-rate energy plans are flexible because you are not locked into a contract — unlike fixed-rate plans – so if you find a better deal and want to switch plans or energy providers, you won't have to pay a penalty.

Why do energy prices fluctuate?

Energy prices are driven by the market. Think of them as you do gasoline prices. The price at the pump changes just about every day, thanks to a variety of influences at work, such as the market price for crude oil, distribution costs, and seasonal demand.

Ever notice that gas prices tend to jump up a bit before a long holiday weekend? The same is true for energy prices. Natural gas as a commodity is traded on the market, so the cost to purchase can also change from month to month. To see how natural gas prices have risen and fallen over the years, visit the U.S. Energy Information Administration website.

And did you know that the cost to bring electricity to your home literally changes from day to day — hour to hour, even? The price depends on many factors like weather, demand, fuel prices to generate electricity, the distribution system and the market. So, while you, as the customer, don't have to contend with daily price shifts, your variable-rate energy plan may still result in regular changes to the energy price you're charged. 

When creating your household budget, your energy costs are one expense that can be difficult to plan. The reality of consuming energy, whether it's at the pump or in your home, is that the prices are in constant flux. Like the pump, they may hover in a general area for several months, but they also can spike or take a tumble.

Is a variable-rate energy plan right for you?

A variable-rate energy plan might be ideal if you like to shop around and keep an eye on prices. Without a contract holding you back, you can quickly and easily jump to a fixed-rate plan if you see a price you're comfortable paying for in the longer term. This flexibility also allows you to switch providers altogether without any penalty charges.

But be prepared: If you're enrolled on a variable-rate plan and you get caught in a big price hike with your supplier, chances are good prices will also be higher with other suppliers due to the same market conditions. Such price hikes are often seasonal and can occur during periods of extreme high or low temperatures. But this variation can deliver the biggest upside to opting into a variable-rate energy plan in the vein of bigger savings for you when the prices go down. Unlike customers who are locked into a price that is set by a contract for several months, catching lower prices in the market can mean more money in your pocket.

Are you paying too much for electricity or natural gas? Check out Direct Energy to learn about variable-rate plans in your area and see if you can save.