Fixed vs. Variable Natural Gas Rates
When consumers choose a natural gas provider, one of the first decisions they need to make is whether they would like to be charged a fixed rate or variable rate for their usage. Because most consumers have a history of purchasing natural gas from a utility, they are not familiar with this choice. In their mind, paying for natural gas is not much different than paying for water or electricity – a monthly bill they have little control over that often fluctuates dramatically in price.
The following information is designed to explain the differences, advantages and disadvantages of variable rates and fixed rates so that natural gas consumers may educate themselves and find a natural gas pricing plan that works best for them.
Variable Rate Plans: What are they? How do they work?
What is a variable rate?
A variable rate is a price determined in large part by the current, or going rate for natural gas in the market.
Just like oil or gasoline or corn or wheat, natural gas is a commodity, or good, that is traded on an open market. Based on many variables that determine the current and expected supply and demand, traders at the New York Mercantile Exchange set the price for natural gas.
This chart, detailing the price of natural gas traded on the New York Mercantile Exchange over a 7-year period gives an indication of natural gas market volatility. As the chart shows, the market price for natural gas is always changing.
How does a variable rate plan work?
Variable rate plans require little work on the part of the consumer. A variable rate customer does not need to sign a contract. Once their service begins, it continues until the customer decides to cancel, which they can do at any time. The variable rate customer will not be charged cancellation penalties or fees.
While a variable rate plan is subject to price swings, it can also help a customer realize the lowest possible costs at a given time. For example, if the market price of natural gas drops for a one month period, a consumer pays less for that month. Conversely, a variable rate could also mean the consumer pays more if prices increase. Generally with a variable rate plan there is no protection against price volatility.
Fixed Rate Plans: What are they? How do they work?
Put simply, fixed rate plans mitigate the risk of market swings. No matter what happens in the world during the specified contract period, a fixed natural gas rate ensures customers that they will always pay the same rate for their natural gas. Demand may increase and supplies may decrease, but a customer on a fixed-rate plan will continue to pay the same flat rate.
How does a fixed-rate work?
Usually, only natural gas suppliers like IGS Energy have the ability to offer consumers a fixed natural gas rate. Depending on the region of the country and area of the state where a consumer resides, a supplier will offer a fixed natural gas rate for a period of six months to a year. The rate may be somewhat greater or somewhat less than the current market rate. The advantage of the fixed rate is that it will be constant for the term of a contract. If prices rise, the consumer is protected against price increases. The consumer will also have the ability to budget a monthly amount towards energy usage, placing them in a greater position of control.
If a consumer chooses a fixed-rate plan with a natural gas supplier, they will be asked to commit to an agreement for a specified period of time. Natural gas will still be delivered to the consumer’s home, as it always has, by the natural gas utility. The consumer will also continue to be billed from their utility, however all bills will note that the natural gas is being supplied by their chosen supplier at the agreed fixed rate.
Contracts may be cancelled, though fixed-rate plans often require an early termination or cancellation fee to be applied. The reason for the fee is because the natural gas supplier must buy or obtain gas to fulfill a customer’s contract months in advance. If the contract is prematurely cancelled, the natural gas supplier is left with an abundance of supply it must now try to sell to someone else.
Customers who sign up for a fixed-rate should be sure that they understand all the terms and conditions of their contract. It’s important to note the contract’s length and the manner in which the agreement can be renewed.
Whether a consumer decides to buy their natural gas using a fixed rate or variable rate, information is the key to making a smart choice. Consumers armed with basic knowledge of fixed and variable natural gas rate plans should be able to decide the best way to take control of their energy costs.
For more information, visit www.igsenergy.com.