The Fixed Rate plan is the gold standard for Texas electricity plans. There are three types of rate classification for electricity plans.
- Fixed Rate
- Variable Rate
- Indexed Rate
About 90% of the plans sold by Texas electric companies are marketed as Fixed Rate. Customers usually prefer these types of plans because they are more predictable. We usually recommend fixed rate over variable rate plans because the rate on variable plans could change dramatically with little or no notice. But most consumers probably misunderstand what it means to have a fixed rate electricity plan in Texas.
Theoretically the definition of a fixed rate electricity plan is one in which the electricity rate you pay is always the same for the entire term of your contract. You might be surprised to learn this is not always the case, however.
When asked, most people would define a fixed rate as being the same every month. But, if you review your electricity bill each month you might notice something different.
Why does my average electricity rate change even though I’m on a fixed rate electricity plan?
Each electric bill in Texas is required to show the actual average electricity rate you pay for each billing cycle. This is your total bill divided by the number of kWhs of electricity you use in the month. It might be difficult to find on your bill. But if you look closely, you will notice that the rate is almost certainly different each month. Sometimes this difference might be quite small. Other times it might be quite dramatic. This is true even of plans that were label and sold as a fixed rate plan.
So if its fixed why does it change?
To understand why this is so you need to understand a little about how electricity plans are priced in the deregulated Texas electricity market and how Texas electricity rates are calculated.
The company that sends you your bill each month is a retail electricity provider. This means they buy wholesale electricity from power generators and resell this electricity to consumers. In between the electricity producers and the retail electricity providers there is the Transmission and Distribution Utilities (TDUs) They are also sometimes called TDSPs.
TDU Pass-through fees
The job of the TDUs is to maintain the power lines and equipment and get the power to where it is needed. For this service they charge a fee to every user of electricity. TDU Fees are charged to the retail electricity provider, but they are passed through to you as the end consumer.
These pass-thru costs have 2 components:
- A flat TDU Delivery Charge
- A per kWh Delivery Charge
For example, CenterPoint Energy the TDU responsible for delivering electricity to the Houston area, charges the following:
| 4.6397¢ per kWh |
| $4.39 per month (flat fee) |
Notice in the CenterPoint example, that there is a flat delivery charge of $4.39 per month for your electricity plan. This amount is the same regardless of how much power you use in a month. This component alone assures that your average electricity rate will always be different unless you use the exact same amount of electricity every month.
Electricity Provider Pricing
Beyond the TDU pass through fees, retail electricity providers are free to price their electric plans any way they choose. This is where the real creativity happens.
Texas electric companies employ a wide variety of pricing structures for their electricity plans. But here are some common components:
| Type | Explanation | Example |
|---|---|---|
| Energy Charge | A per kWh charge | 8.8¢ per kWh |
| Base Charge | A fixed dollar amount charged each month | $10.00 per month |
| Usage credit | A fixed dollar credit applied to your bill when your usage meets certain thresholds. | $100 bill credit if your usage exceeds 1000 kWh per billing cycle |
When an electric company labels a plan as a Fixed rate plan, they are usually referring to the energy charge. In the example above, the energy charge is the same rate per kWh regardless of how much electricity is used. But the fixed components of the pricing (Base Charge, Flat TDU Delivery charge, Usage Credit) are added on to your final bill regardless of how much electricity you use. This causes your average electricity rate to differ from month to month.
(Note that the effect of the usage credit can have a substantial impact on your true average electricity rate. Plans that involve usage credits are called Bill Credit plans and deserve their own analysis. Read more about bill credit plans.)
Calculating your average electricity rate
To calculate an average electricity rate, you must divide the total cost on your electric bill by the number of kWhs used.
For example:
| Total bill: | $100 |
| Total kWhs used: | 1000 |
| Average electricity rate: | 10¢ per kWh |
This is a simple calculation as long as the pricing is solely based on a per kWh price. But when a flat rate component is added such as a $10 base charge the average rate will always vary depending on how much electricity is used.
Here is an example of how base charges effect your average electricity rate. Consider the sample pricing structure below. This plan might be marketed as a Fixed rate plan with a price of 10¢ per kWh for 1000 kWh of usage.
| Energy Charge: | 9¢ per kWh |
| Base Charge: | $10 per Month |
| Total kWhs used: | 1000 |
| Total bill: | $100 |
| Average electricity rate: | 10¢ per kWh |
At exactly 1000 kWhs the average electricity rate is 10¢ per kWh.
| 9¢ per kWh x 1000 kWh | $90 |
| Base Charge: | $10 |
| Total bill: | $100 |
| Average electricity rate: | 10¢ per kWh |
But that same plan would have a different average electricity rate if you used only 500 kHw
| 9¢ per kWh x 500 kWh | $45 |
| Base Charge: | $10 |
| Total bill: | $55 |
| Average electricity rate: | 11¢ per kWh |
If you use 1500 kWh of electricity under this plan, the average rate drops to 9.5¢ per kWh
Note: for the purposes of this discussion we have disregarded any sales tax or other local assessments that could impact your utility bill.
These examples may seem a bit confusing. But they are actually simplified examples of plans sold by Texas electric companies. The pricing structures of electricity plans can get way more complex than this.
Below is a real world example of an Electricity Facts Label for a Fixed Rate electricity plan sold by Octopus Energy. It illustrates the concepts we have discussed. Notice that the Average price per kWh is different depending on how much power you use in a month.
What type of plan would have the same average rate regardless of how much electricity I use each month?
In order to accomplish a truly fixed rate, the TDU delivery charges (both fixed and per kWh) would have to be bundled into one constant electricity rate that includes both the TDU delivery costs and the electricity providers energy charge. These are called bundled or bundled rate plans. Read more about bundled electricity rate plans here.