Fixed-Rate vs Variable-Rate Plans

In February 2021, Winter Storm Uri hit Texas. The grid nearly failed. Wholesale electricity prices spiked to $9,000 per megawatt-hour for several days — the regulatory cap.

A small number of Texans were on variable-rate or indexed-rate retail plans that passed those wholesale prices straight through. They received bills for $5,000, $10,000, in some cases $17,000 — for a single week of usage.

That's the gap between fixed and variable in Texas, in one sentence.

The three plan structures, plain

Every Texas residential plan is one of three structures.

Fixed-rate. Your per-kWh energy charge is locked for the contract term (typically 12 or 24 months, sometimes 6 or 36). The REP absorbs wholesale market risk — if prices spike, you keep paying your locked rate. If you leave the contract early, you pay an early termination fee.

Variable-rate. Your per-kWh rate floats month to month. The REP can change it with notice (usually 14 days). There's no early termination fee — you can leave any time. But you're exposed to month-over-month price changes, and the REP decides how much to pass through.

Indexed. Your rate is tied directly to an external price index, usually ERCOT spot prices or natural gas futures. This is what blew up during Uri. The REP doesn't absorb wholesale risk — you do, in real time.

The first two are the only ones most residential customers should consider. The third is what we'll address head-on below.

Why fixed-rate wins for most Texans

For a representative Texas household using 1,000 kWh/month on a 12-month fixed-rate plan at 10.5¢/kWh, the annual energy charge is about $1,260. Predictable. Budget-able.

The same household on a variable-rate plan might pay 9.8¢ in March, 10.4¢ in April, 12.1¢ in July, 14.8¢ in August. Total annual energy charge ends up similar in a calm year — sometimes lower. But in a hot summer (or a cold winter), the variable customer can pay 30–50% more.

The REP knows the wholesale market better than you do. The REP knows when prices are likely to spike. The REP sets the variable rate. You're betting against a counterparty with better information.

Fixed-rate plans take that asymmetry off the table.

When variable actually makes sense

Variable-rate isn't always wrong. There's a narrow set of scenarios where it's the right call:

You're moving in 2–4 months. A 12-month fixed plan locks you in. The early termination fee is often $150–$295. If your timeline is short and the ETF exceeds your projected savings, a month-to-month variable plan is cheaper.

You're between fixed contracts. Your old contract just expired and you want a month or two to shop properly without rolling onto an inflated auto-renewal rate. Variable is the bridge.

Wholesale rates are at a multi-year low and you want exposure. Rare. Sophisticated. Requires watching ERCOT pricing weekly. Not for most people.

Outside those scenarios, fixed-rate is the answer.

Indexed plans: why they're a trap

Some "variable" plans are technically variable, but others are indexed — your rate is the wholesale ERCOT price plus a fixed markup. In normal weather, those plans look great. The markup is small, wholesale prices are low, the bill is competitive.

When ERCOT hits scarcity pricing — extreme heat, extreme cold, grid stress — the wholesale price can multiply 10x or 100x in hours. Indexed plans pass that straight through. There's no cap.

After Uri, the PUCT tightened rules and the market mostly moved away from pure indexed-rate retail products. But a few persist, often marketed under names that sound like normal variable plans. Always check the EFL for the words "indexed," "wholesale pass-through," or "ERCOT real-time."

If you see any of those phrases, walk away. The 2021 bills proved this isn't a theoretical risk.

The early termination fee math

The strongest argument against fixed-rate is the early termination fee. If you sign a 24-month contract at 10¢/kWh, then rates drop and you want out at month 6, the ETF (typically $150–$295) is what you pay to leave.

But the math usually works out in fixed-rate's favor. Two scenarios:

Rates drop after you sign. You pay the ETF, switch to a lower rate. Whether you come out ahead depends on how much rates dropped and how many months are left. Run the numbers: monthly savings × remaining months vs. ETF.

Rates rise after you sign. You're insulated. Your locked rate is below market. You "win" without doing anything.

The second scenario is more common in Texas than the first. Wholesale prices tend to rise faster than they fall. Fixed-rate plans implicitly bet that you're going to want that floor.

What 24-month plans buy you

A 24-month fixed plan typically prices 0.5–1.5¢/kWh below an equivalent 12-month plan. Over 1,000 kWh/month for 24 months, that's roughly $120–$360 in total savings.

The trade-off is commitment. You're locked in for two years. If you move out of state, the contract is usually portable to your next Texas address or waivable on proof of move. If you switch REPs early, you pay the ETF.

For settled households with stable usage, 24-month plans are usually the right call. For renters with shorter time horizons, 12-month is the standard recommendation.

What 6-month and month-to-month plans are for

A handful of REPs offer 6-month fixed plans. The rate is typically slightly higher than 12-month (the REP is taking less hedging risk on a shorter term). It's a useful bridge if you're planning to move in less than a year.

Month-to-month plans are technically variable-rate, but priced as a "current rate" that the REP can change with notice. They exist for people who genuinely can't commit — short leases, transitional housing, in-between addresses. The rate is almost always higher than any fixed-rate option.

When to lock and when to wait

The cheapest time to lock a 12- or 24-month fixed-rate plan in Texas is November. Three reasons:

• Summer demand has dropped, so wholesale prices are at their seasonal floor.
• REPs need to clear their books before year-end, so promotional pricing peaks.
• Winter is approaching but hasn't hit yet, so freeze-event risk premium isn't priced in.

The worst time to lock is late August. The market is anticipating the next summer. REPs have just paid out high wholesale exposure. Pricing is conservative.

If your current contract expires in a bad shopping month, lock a short-term bridge plan and re-shop in November. The 30 days of slightly higher rate is cheaper than a 12-month lock at a seasonal peak.

The honest close

If you're a normal Texas household trying to budget electricity, fixed-rate is the answer. The flexibility of variable isn't worth the asymmetry of betting against your REP on price.

If someone is selling you on the "freedom" of variable-rate or the "savings potential" of indexed pricing, ask them what their plan paid out during Uri. Their answer will tell you whether they understand what they're selling.

Lock the rate. Mark the expiration. Re-shop 30 days before it ends.

That's the whole strategy.

» MORE: Understanding the EFL · What is ERCOT?