How to Choose the Right Energy Plan

Energy deregulation gives residents and businesses the power to choose their electricity provider and plan — empowering consumers to take control of their  energy costs. But if you’re new to deregulation, selecting your energy provider and plan can be a complicated and overwhelming process.

You may be wondering, what’s the difference between indexed, variable, and wholesale options? Is a renewable energy plan really coming from renewable sources? What’s the best plan term length?

Navigating a deregulated electricity market can be stressful, but Choose Energy breaks down the complicated energy terms to help you choose the best energy plan for your needs.

An electricity plan has three main components: type of plan, rate structure, and payment option. Let’s start with type of plan, which is an overview of the rate you pay.

Fixed-rate plan

Best for: a traditional set-up, long-term stability

A fixed-rate plan is a good option if you’re a homeowner looking for stability, predictability, and an energy bill that can be worked into a monthly budget. These electricity plans charge the same rate per kilowatt-hour (kWh) throughout the length of your contract, though your monthly bill may still fluctuate based on your utility company fees (listed as TDU or TDSP charges on your bill) and overall usage.

Pros: 

• Your energy bills are more predictable
• Your rate will not change for the duration of your contract
• You’re protected from weather or demand-induced fluctuations in the energy market

Cons:

• You may not be able to switch plans without a penalty
• You’ll likely be charged an early termination fee (ETF) if you cancel your plan before the contract is up
• It’s harder to take advantage of lower market prices, especially if you move frequently

Variable-rate plan

Best for: low seasonal rates, flexibility

On a variable-rate plan, your rate is based on the current market value of electricity and rates can change as long as you use this plan. These changes typically occur month-to-month. A variable-rate plan may carry some risk, depending on the rate structure your chosen plan uses, but it may be a good option if you move frequently or need to switch plans often.

Pros:

• There’s no contract, so you have the flexibility to switch plans with no penalty
• You can take advantage of market lows (like spring and fall) to get lower rates

Cons:

• You may have higher rates during times of increased energy demand like summer or winter
• You have to monitor the market rates to know if you’re saving money

Indexed-rate plans

Best for: more choice and control over your rates

While variable-rate plans are calculated based on current market values, indexed rates are calculated using a different benchmark, or index. The rate you pay could fluctuate depending on the movement of that specific benchmark.

Some providers calculate a stable rate for the duration of the contract based on the closing price of the index on a specific date. Other providers change rates with the index price on a day-to-day or month-to-month basis. Due to their complexity, indexed-rate plans may not be the right type of plan for retail customers.

It’s very important to read the plan’s contract and understand how the rates are calculated. The Public Utility Commission of Texas (PUCT) has prohibited indexed-rate plans in Texas, so keep in mind that these types of plans are not available everywhere.

Pros:

• Your rate may be lower when there are market fluctuations
• There is a higher level of transparency, as you can track public market prices to see their impact on your bill
• It may be easier to understand how your bill is calculated

Cons:

• There is less stability and predictability involved in indexed-rate plans
• Your rates can rise very quickly because of market fluctuations
• You need a strong understanding of the energy market to properly take advantage of indexed-rate plans

This second piece of your energy plan — the rate structure — is the breakdown of how your rate is calculated.

Stable rate

Available for: Fixed-rate and Indexed plans

A stable rate is when you pay the same amount for each kWh of electricity. This type of rate is available for fixed plans and some indexed plans. If you choose an electricity plan with a stable rate, you can’t take advantage of seasonal market lows. At the same time, you don’t have to worry about seasonal market highs. Overall, stable rate structures are best if you’re looking for predictability without having to worry about what the energy market is doing at any given time.

Flat rate

Available for: Fixed-rate plans

With flat-rate pricing, you are charged the same price no matter how many kWh you use, as long as you generally stay within a set range. The electricity company reviews your usage history to determine how much to charge, and you’ll pay that price each month. However, you may be charged extra if you go over your typical usage.

If you use about the same amount of energy each month or only need a little more every once in a while, a flat-rate electricity plan might be a good solution. Vary too much in your usage, and you may end up paying a lot in excess fees.

Tiered rate

Available for: Fixed-rate plans

Tiered rates are common in plans where a provider designates certain usage buckets. For example, you might pay a flat fee of $75 for up to 1,000 kWh, and another $75 for the next 1,000 kWh. This means that you would pay an extra $75 whether you used 1,001 kWh or 1,999 kWh. These buckets are set when you sign up and stay the same for the contract period.

If you typically use just enough energy to roll over into a higher usage bucket, a tiered rate structure might not be ideal. But if you find yourself within the range of one of the usage buckets, this could be a good way to get more electricity for less.

Bill credits

Available for: Fixed-rate plans

Bill credits are a type of pricing for fixed-rate plans that credits your account if you fall into a certain usage bucket. The credit amount and usage bucket will be noted in your plan details, and they will stay the same for the duration of your contract.

If you typically use the same amount of electricity every month, you could consider a plan with a bill credit for that usage tier. But if your energy usage fluctuates, a more forgiving rate structure might work better.

Time-of-use pricing

Available for: Fixed-rate plans

Time-of-use pricing can help you save big on energy costs if your electricity usage lines up with lower times of demand. The rates you pay are fixed at the price listed in your contract, but those electricity rates may vary based on different times of the day or week. For example, your electricity could cost less or be free from 10 p.m. to 5 a.m. on weekdays when overall market usage is lower

A time-of-use structure is helpful if you can be flexible and save energy-intensive chores like laundry for less expensive times such as nights or weekends. Or if you know you’re out of the house during the day and use most of your electricity at night, a time-of-use plan with lower nighttime prices might work for you. It’s best to know your usage habits before signing up for this type of plan.

Variable rate

Available for: Variable-rate and Indexed plans

Variable rates follow the flow of the energy market, where high demand equals a higher price and low demand equals a lower price. Depending on the weather, your rate could fluctuate in either direction from one month to the next. Your provider determines how your rate will change, so be sure to read your contract carefully.

If you’re comfortable embracing more risk for a chance at a greater payoff, a variable-rate energy plan could be the right type of plan for you.

Wholesale pricing

Available for: Variable-rate plans

Wholesale refers to buying energy in bulk and essentially allows consumers to skip the retail electric provider middleman. The final bill usually includes the service subscription fee, the wholesale price of electricity, and fees from the utility company and state electricity grid.

Wholesale electricity can get you a lower price than retail value, but there’s substantial risk involved and is not typically recommended for the average consumer. When energy is in high demand (think summer and winter), wholesale prices can surge, which can lead your bill to jump hundreds of dollars in a matter of days. Because of this, most wholesale providers do not have an ETF.

Wholesale subscribers must constantly monitor the market (prices can change every five minutes) and be ready to turn off big energy users in their homes as soon as the price spikes. If you’re looking for more stability for your bill, enter your ZIP code above to shop retail electricity rates instead.

The final part of the energy plan bundle, the payment option, determines when you pay.

Prepaid plan

Prepaid plans allow you to pay for your electricity before you use it, much like a prepaid cell phone plan. If you’re on a budget or just want motivation to use less energy, this might be the right electricity plan for you. Prepaid options are available for fixed and variable-rate plans. Given the payment structure, you don’t need to pass a credit check or pay an upfront deposit like most other plans.

However, you need to keep an eye on your energy usage — if you use more electricity than you’ve paid for, you will need to add funds to your account before your power turns off. Your provider will monitor your usage and let you know if you need to top off your account.

Additionally, not everyone is eligible for a prepaid plan. In Texas, for example, residents who require critical home healthcare cannot choose a prepaid energy plan. Finally, prepaid rates tend to be higher than other types of electricity plans. If you’re able to monitor your energy consumption, you may like the control that comes with a prepaid plan.

Postpaid plan

A postpaid plan is how most people pay their energy bills. Most electricity companies require a soft credit check to determine whether or not you’ll have to pay a deposit before beginning postpaid or traditional energy service. The deposit is a sign of good faith that you will pay your electricity bill after you consume the energy. These plans involve your provider billing you at the end of each month for your energy consumption —  your bill is based on your usage and the price per kWh. The downside here is that you may not know your usage until you get your bill.

Contract length is another key factor when you’re exploring energy plans. Most providers offer a variety of term lengths, some of which have ETFs.

Month-to-month

Best for: Short-term renters

Available for: Variable-rate and Indexed-rate

Month-to-month contracts are typically only available for variable-rate and indexed plans because energy companies understand that the fluctuating market and commodity index are out of your control. Going month-to-month allows you the freedom to switch plans anytime, but you’ll get very little stability in return. If you don’t like shopping for energy plans often, this is not the plan type for you.

Three- to six-month

Best for: Short-term renters

Available for: Variable-rate

Three- to six-month plans are good options for renters or people who don’t mind shopping around a few times a year. Short-term electricity plans can help you take advantage of low seasonal rates but require more effort on your part. If you forget to sign up for a new plan before your current one expires, you could end up re-enrolled at a much higher rate.

12-month

Best for: Renters

Available for: Variable-rate and Fixed-rate

12-month plans are similar to three- or six-month plans but give you more time in between shopping. These plans are good for people who don’t want to frequently shop for a new plan but might move in the next year or so. You won’t have to pay an ETF if you decide to switch to a new energy plan when the year is up.

24- to 36-month

Best for: Homeowners and long-term renters

Available for: Fixed-rate

Long-term 24- to 36-month plans are only available at fixed rates and give homeowners and long-term renters maximum price stability. There are ETFs if you cancel before the term is up, but you won’t have to worry about market fluctuations for a few years. If you’re looking to sign up for a plan and not have to think about it again for a while, a long-term plan could be the right option for you.

Green energy has come a long way in the last few years, and many energy providers offer renewable energy plans to their customers. Read your Electricity Facts Label (EFL)  to find which type of renewable energy you’re getting. When you’re ready, enter your ZIP code on this page to explore the best renewable energy plans in your area.

100% renewable energy

This is the most straightforward renewable energy option and the best electricity plan if you’re looking to reduce your carbon footprint. These eco-friendly plans provide your home with energy directly from renewable sources, usually wind energy or solar power.

Renewable energy credits (RECs)

Renewable energy credits are a way for your electricity provider to offset traditional energy consumption by purchasing enough credits from green energy resources to equal your usage. If you’re unable to install solar panels or use another type of renewable energy system in your home, RECs still allow you to utilize green energy.

Carbon offsets

Carbon offsets are similar to RECs in that they neutralize energy you use from non-renewable sources. Under a carbon offset plan, your home’s energy may be sourced through fossil fuels, but the electricity company will invest in CO2-reducing projects on your behalf to balance it out.

Buyback programs

If you have solar panels or wind turbines at your home, you may be able to sell the excess energy you generate to lower your bill. Your electricity provider will buy the energy back from you or give you credits to use during months when your home requires more energy than it produces.