Types of Energy Plans
Deregulation resources

How to pick the right electricity plan

With so many energy providers offering so many different options, choosing the right electric plan for your needs can quickly become complicated. At Choose Texas Power, we try to demystify the process with simple guides that make shopping easy.

This guide will give you all the terminology you need to understand what each deregulated energy plan you see is promising. If you have questions, give us a call and one of our team members can clear up the confusion. Let’s get started.

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Types of electric plans

The first step to picking an energy plan is understanding what type of plan it is. This is different from the rate it carries, though some terms may appear similar. The different types of plans are as follows:

Fixed: A fixed electricity plan is exactly what it sounds like. The terms and rates inside will not change for the duration of your contract. This makes it a good choice for people who like stability and don’t want to worry about fluctuating prices on the market.

Variable: A variable electricity plan comes with a little less stability than a fixed plan, as the rate you pay for electricity changes with fluctuations in the energy market. This type of plan’s stability (or instability) depends on its rate structure, but the main thing to remember is that it will change over time.

Indexed: Indexed plans are less common than the previous two, but you may still see them. An indexed plan is similar to a variable plan in that the rate changes over time, but it is calculated in a different way. Instead of calculating your rate based on the market value of electricity, your provider will base it on a commodity index. How much variation you’ll see depends on the formula your provider uses, so be sure to carefully read the contract before committing.

Pricing

While you may see “prepaid plans” referenced frequently, pricing doesn’t really count as its own plan type. We’ve included it here in an effort to be clear about your options.

Prepaid: Prepaid plans are, unsurprisingly, plans that require you to pay for electricity before you use it. People who choose these plans often do so because they want to stick to a certain budget and know ahead of time how much they will be spending. Additionally, prepaid plans are a popular deposit- and credit check-free option.

If you choose a prepaid plan, it is important to note a few quirks to this payment structure:

  • Automatic disconnects. When you reach the set amount of energy you pay for, the lights turn off. They’ll turn back on within a few hours when you add money to your account.
  • Limited eligibility. In Texas, residents with electric medical equipment cannot purchase prepaid plans.
  • Higher rates. Because they are deposit- and credit check-free, the rates for these plans can be higher than traditional electricity plans.

Postpaid: This is the most popular choice for energy bills. Like many other bills, your energy company will send you the invoice at the end of the month. All plans are postpaid unless they specifically state otherwise.

Bill credits: Bill credits are available on some fixed rate plans, and function as a reward for using a certain amount of energy in a given month. For example, your provider may offer a $40 reward if you use between 1000 and 1200 kilowatt-hours (kWh) in a month. This “usage bucket” is set in your contract and will not change. This is a good option if you know you almost always fall into the usage bucket the provider has designated.

Types of rate structures

The second piece to energy plans is the rate structure. This is where things get confusing, as rate structures use similar terminology to plan types. Think of rate structure as a category within the type of plan you choose. Not all types of plans offer all rate structures. It is broken out as follows:

  • Rate structures available for fixed plans

    Fixed, flat, tiered, time-of-use.

  • Rate structures available for variable plans

    Variable, wholesale.

  • Rate structures available for indexed plans

    Fixed, variable.

Let’s look at how these rate structures behave for an example usage: 1000 kWh. We’ll calculate supply charges, the amount you pay for your usage not including taxes and fees.

Fixed rate

While this rate structure uses the same terminology as a fixed plan, not all fixed plans have fixed rates. A fixed rate really means a stable rate, where you pay the same amount for each kilowatt hour you use. This is the simplest rate structure.

Usage: 1000 kWh

Fixed rate: 7.4¢/kWh

Supply charges: 1000 x 7.4¢ = $74

Flat rate

If you choose a plan with a flat rate, you are charged the same amount regardless of how much energy you use, within a certain range. Your electric company will use your usage history to decide your rate and may charge extra if you exceed your average usage. You will also be charged the same amount if you use less than usual.

Usage: 1000 kWh Flat rate:

$74 for 800-900 kWh, $30 overage fee

Supply charges: 900 kWh at $74 + $30 = $104

Tiered rate

On a tiered rate structure, the energy company designates certain usage buckets and charges differently for each one. This can be done in a number of different ways, with a flat rate up to a certain usage and a traditional rate after that, or a different rate for every usage bucket.

Usage: 1000 kWh Tiered rate:

7.4¢/kWh up to 800 kWh, 9.5¢/kWh for 801-1300 kWh 8.3¢/kWh for 1300+ kWh

Supply charges:

(7.4¢ x 800) + (9.5¢ x 200) = $78.20

Time-of-use rate

Time-of-use rates are the types of rates used by plans that offer, for example, free electricity at night or on weekends. The idea behind this structure is that the provider can offer different rates for different times of the day or week. These time buckets stay the same for the duration of your contract.

Usage: 400 kWh (weekday) + 600 kWh (weekend) = 1000 kWh

Time-of-use rate: 7.4¢/kWh on weekdays and 4.3¢/kWh on weekends

Supply charges: (7.4¢ x 400) + (4.3¢ x 600) = $55.40

Variable rate:

A variable rate, once again, uses the same terminology as a variable plan type, but not all variable plans use a variable rate structure. A variable rate structure means the rate you pay changes based on the status of the energy market. When demand is high, your rate is high. When demand is low, your rate is low.

Usually, this rate will fluctuate from month-to-month depending on how your provider calculates it. The benefit of these plans is that they often do not have early termination fees, so you can switch when price spikes are imminent and hop from low rate to low rate. However, that carries with it a lot more risk for high bills.

Usage: 1000 kWh

Variable rate: 7.4¢/kWh in June and 9.5¢/kWh in July

Supply charges (June): 7.4¢ x 1000 = $74 Supply charges (July): 9.5¢ x 1000 = $95

Wholesale rate

A wholesale rate is the riskiest of all plan and rate options. Wholesale rates are directly connected to the spot price of electricity, which changes every five minutes. That means the rate you pay for electricity also changes every five minutes.

For the average customer, it is impossible to constantly monitor wholesale prices and turn off devices, lights, and HVAC systems whenever prices spike. In the summer when temperatures and prices in Texas jump, wholesale bills can add up to hundreds of dollars in a matter of days. For this reason, we do not list wholesale options in our marketplace.

Length of contract

The final hurdle to picking an energy plan is the length of contract. This is probably the most straightforward part, and really depends on your preference. Renters may choose shorter contracts, while homeowners may be comfortable committing for longer. Contracts are available in the following lengths:

  • Month-to-month
  • 3- to 6-month
  • 12-month
  • 24- to 36-month

Month-to-month is the most common option for variable or indexed plans with variable rate structures, because the price changes so frequently based on factors out of the consumers’ control. Beyond that, it primarily depends on how often you want to shop for a plan. 3- to 6- month plans require more effort on the part of the consumer than 24- to 36- month plans, but longer plans require longer commitment to an electric company or willingness to pay early termination fees.

Whichever term length you choose, it is important to read the full contract before you commit. This will give you important details about what happens when your contract expires (often you’ll be enrolled at a higher rate, unless you expressly switch to a different plan or provider).

Electricity plan cheat sheet

Buying electricity requires a lot of information. However, just a little research and due diligence can make a big difference in finding an energy plan you are happy with. Let’s sum up all the options:

  • Type of energy plan

    Fixed, variable, or indexed

    Prepaid or postpaid

  • Type of rate structure

    Fixed, flat, tiered, time-of-use, variable, wholesale

  • Length of contract

    One-, three-, six-, 12-, 24-, or 36-month

The most important part of choosing an energy plan is finding one you are comfortable with. If you’re not sure what you need or are having trouble sorting through the options, give us a call and one of our team members can clarify any questions you have. If you have all the information you need, enter your ZIP code above and we’ll take you to the marketplace.

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