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Understanding Electricity Plans: Fixed, Variable & Indexed

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Fixed Rate? Variable? Indexed? With so many options for electricity plans in a deregulated market, how can you know what to choose? In this case, knowledge is power. The more you know about each plan, the easier your decision will be, and the more money you will save. So read along to understand each plan, and find the right fit for you.

When it comes to powering your home, you have many options. How do you know what plan is best for you and your lifestyle?

If you are lucky enough to live in a deregulated market, and everyone who lives in Texas does, you have multiple options when it comes to electricity plans. But with different plans, how do you know which to choose? How will you know which plan will save you the most money?

Well, in order to figure out which plan is best, you must learn about each plan. There are currently three plans Texans can choose from: Fixed Rate, Variable Rate and Indexed Rate.


Fixed Rate

A fixed rate plan locks you into a predetermined rate for a certain length of time as outlined in your contract. Most fixed rates plans last for two years, but the length of the plan may vary. The best time to sign up for a fixed rate plan is early spring, right after the peak of the winter and before the peak of the summer. This will ensure the lowest rate.

  • Pros:
    • A fixed rate will save you the most money when the prices of electricity are rising
    • Provide consistency and reliability – you will never be surprised by your bill each month
    • Easier to budget – know the bill will stay constant each month
  • Cons:
    • If electricity prices fall, you are stuck paying a more expensive rate
    • Early termination fees – locked into the contract and will need to pay a fee if you change your mind
    • Do not have any flexibility

This plan is best for people who are seeking a stable electric bill each month. There is a sense of comfort in knowing exactly what you will get, but there is a lack of flexibility that comes from that.


Variable Rate

Unlike the fixed rate, a variable rate plan changes month to month, depending on the market price of electricity. Because of the constant fluctuations of the electric market, it is likely that your electric bill will be different each month, even if you consume the exact same amount of electricity.

  • Pros:
    • Can save you the most money – able to take advantage of declining electricity prices
    • No cancellation fees – have the freedom to switch providers or start a new plan whenever you desire
    • Best for people that move often and do not want to be locked into a plan
  • Cons:
    • You are susceptible to a large spike in monthly cost – if electricity prices increase dramatically, your bill will reflect that cost
    • Unpredictable bill each month
    • A spike in prices could dramatically affect your financial stability

This plan is best for temporary housing, or if you are in the market for a fixed rate plan but want to wait for prices to decrease. If you are not able to recover from a spike in energy prices and therefore a spike in overall cost, this plan is not fitted for you. With a variable rate plan, you will have increased flexibility and freedom, but a lack of reliability.


Indexed Rate

Last but not least is the indexed rate plan. This plan is the most complex of the three. To simplify, an indexed rate plan means that the price of your electricity is tied to another underlying variable, or index. This index might be the cost of natural gas for the month, or anything else along those lines. The price of the index defines the price of your electricity through a certain formula that your electricity provider will establish. This variable, or index, must be disclosed in the contract that you sign.

  • Pros:
    • Price can be variable – therefore will have the same benefits of a Variable Rate Plan
    • Price can also be fixed – therefore will have the same benefits of a Fixed Rate Plan
    • Freedom to decide
  • Cons:
    • The price of the variable can increase or decrease – which means your bill can increase or decrease monthly
    • Customers must be active and involved in understanding the price of the variable and how that affects your electric bill
    • Requires the most customer research and knowledge of the three plans

This plan requires the most customer knowledge and activity. If you are an active consumer and enjoy researching the best deal, this plan might be a great fit for you. This plan can either be constant or changing, or in other words, fixed or variable. This plan may seem confusing, but your energy provider should be able to answer all of your questions!

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