Should I Choose Fixed or Floating Electricity Rates in Alberta?

You've decided that you want to purchase your electricity from a competitive retailer in Alberta, but you're not sure whether you prefer a fixed rate or floating (variable) one. We go through the pros and cons of each to help you decide which rate is right for you.

Fixed or floating electricity rates: which is right for you?

Fixed vs. Floating vs. Regulated Rates: A brief summary of your Alberta electricity options

Since 2001, Albertans have had the ability to choose from whom they purchase their energy supply. There are two types of energy retailers in Alberta: regulated rate providers, and competitive energy retailers. Regulated rate providers have the exclusive right to sell regulated rate option (RRO) electricity within a given electricity distribution utility's service territory. Competitive retailers are not geographically limited and can sell electricity in all of the service territories of the wires services providers with which they have agreements. Unlike regulated rate providers, they can sell electricity at both fixed and floating rates.

Regulated Rate Option

The regulated rate option is a variable rate that is approved by the Alberta Utilities Commission (AUC) and changes every month. It is the default option for customers who do not choose to purchase a contract from a competitive energy retailer for their electricity. Many Albertans appreciate the simplicity and ease of purchasing the regulated rate option, as well as the peace of mind from knowing that rates are approved by a government-appointed body. However, the regulated rate option is not necessarily the cheapest option, and customers may prefer choosing a competitive energy retailer for superior customer service or to support a cause that they believe in (e.g. supporting green energy, local business, or local charities). 

Fixed Rates

Most competitive energy retailers offer at least one type of fixed-rate contract for electricity. Fixed rate electricity contracts offer a locked-in price per kilowatt-hour that is guaranteed throughout the term of the contract. In Alberta, fixed-rate electricity contracts can be offered for a maximum of five years. However, most competitive energy retailers' offers are for less than five years.

Choosing a fixed rate for your electricity offers several advantages. First, it offers some insulation against price shocks, as the price you pay for your electricity is not directly linked to market prices. This price predictability can be helpful for monthly budgeting (though keep in mind that your monthly bill total will vary in function with the amount of electricity you consume per month). Over the long run (over a year or more) paying a fixed price could save you money, as average prices have tended to increase in recent years. However, as fixed prices are often slightly more expensive than variable prices, it is not likely that your savings would be considerable on a fixed rate. Also, keep in mind that you are also not guaranteed the same rate when your term ends and it is time to renew, so choosing a fixed rate may only delay inevitable energy price increases, as opposed to being able to avoid them altogether.

Is there a big difference between fixed rate contracts?

Until fairly recently, before the development of the Utility Network and partners, there were only three major competitive energy retailers that offered fixed rate electricity contracts: ENMAX, Direct Energy, and Just Energy. According to the Market Surveillance Administrator (MSA), whereas from 2006 to 2010 there was a wide variety of price offers, prices for fixed rate contracts have converged since 2010. The MSA suggests that this may mean that markets are becoming more competitive, as consumers have switched from higher to lower priced contracts, and suppliers have been forced to lower their rates. However, over a long-term contract, even a small difference in rates can work out to a big difference in total energy bills.

It is also a good idea to compare retailer administration fees and late payment charges to get a better idea of which competitive energy retailer is right for you, as some of these fees can vary considerably depending on the retailer.

Floating Rates

Competitive floating rate contracts sell electricity at the wholesale price, plus a certain amount per kWh transaction fee (usually a fraction of a cent and not more than two cents). The advantage of sticking to market prices is that you pay the market price, which is generally thought to be the cheapest option over the long run. However, paying the market price can be a bit of a double-edged sword; while this allows you to take advantage of price drops, you also must be prepared to weather price spikes. Also keep in mind that prices tend to rise considerably during times of increased demand (usually extremely hot or cold weather). This means that you often are obliged to pay higher prices during the months you use the most electricity, which can make for an especially large bill for certain months.

Do floating rates vary depending on the supplier?

As is the case with fixed price retailers, the price of floating electricity offers does vary slightly depending on the retailer. This is because there is some variation in the amount of transaction fee charged. However, differences in transaction fees are often no more than a fraction of a cent, making the total difference fairly insubstantial.

If you are looking for a floating electricity rate contract and are mostly interested in the price, we suggest you compare administion fees and late payment charges

Pros & Cons of Fixed Rates

The major advantage of choosing a fixed rate is the stability and peace of mind that it offers. As the regulated rate option and floating electricity contracts are tied to market prices they can fluctuate considerably, whereas a fixed rate plan offers you some protection against this. However, fixed rates incorporate a slight price premium in order to be able to offer this price stability, meaning that they can often be slightly more expensive than choosing a price that is tied to the wholesale price. 

Another advantage of choosing a fixed rate is for the ability to choose what type of power you want. Many retailers that provide green energy offer fixed-rate contracts as opposed to floating prices, so if you are looking for green energy, a fixed rate may be your only option.

Pros & Cons of Floating Rates

The main advantage of choosing a floating rate option for your power is being able to take advantage of market prices, which generally have proven to be cheaper for residential customers. However, this means that you must be prepared for some variation in your monthly bills, which may not be ideal for all customers.

While all competitive energy retailers offer fixed power rate contracts, fewer retailers offer floating rates for electricity. Depending on your outlook, this can be either an advantage or a disadvantage. While fewer competitors means a smaller range of choices, sometimes having fewer options makes it easier to choose a plan.

Which Type of Rate is More Popular in Alberta?

According to the Alberta Market Surveillance Administrator, most Albertans who purchase retail energy contracts choose fixed rate electricity contracts. Does this mean that a fixed rate is best for you? Not necessarily. Many of the larger competitive energy retailers, such as Direct Energy or Just Energy, do not currently offer floating rate contracts for electricity, which may in part explain why floating electricity rates are not more popular. 

Conclusion

For customers who are able to handle a bit of variation in their monthly utility bill and who are looking to pay the lowest prices possible, we recommend choosing a floating electricity rate from a supplier with lower monthly administration fees. While they are perhaps less known to most Albertans, many of the smaller retailers operate with lower overhead and are able to charge less than the larger retailers and the regulated rate providers. We recommend a floating rate over a fixed one as ultimately all electricity in Alberta must be bought and sold on the market, making it difficult for consumers to avoid long-term electricity price increases.

For customers who prefer more price stability, or customers who are looking for green energy, we recommend looking at the fixed electricity price offers from some of the smaller competitive retailers in Alberta. While they are newer than the larger energy retailers in Alberta, their offers tend to be slightly lower than that of their larger competitors. Smaller, Alberta-based retailers offer offer green energy that is just as rigorous (or sometimes more) than their larger competitors.

Check out some of the options for your power supply in Alberta!