AI Summary: Fixed vs Indexed Electricity
Fixed-rate electricity contracts lock in a set price per kWh for 12-36 months, providing budget certainty. Indexed rates fluctuate monthly based on wholesale ERCOT prices plus a fixed markup, offering potential savings but exposing businesses to price volatility. Fixed rates are best for businesses prioritizing predictability, while indexed rates suit sophisticated buyers who monitor wholesale markets and can tolerate risk. Most Texas businesses choose fixed rates for stability.
Fixed vs Indexed Electricity Rates in Texas: Complete Comparison
Understanding Fixed vs Indexed Electricity Rates
Texas businesses can choose between fixed-rate and indexed-rate electricity contracts. Each has distinct advantages and risks:
Fixed-Rate Contracts
Lock in a set price per kWh for the contract term (12-36 months). Your rate never changes, regardless of wholesale market fluctuations.
Indexed-Rate Contracts
Your rate fluctuates monthly based on wholesale ERCOT prices plus a fixed markup (e.g., wholesale + $0.02/kWh).
How Fixed-Rate Electricity Works
Fixed-rate contracts are the most common choice for Texas businesses. Here's how they work:
Fixed-Rate Contract Structure:
- Contract Term: 12, 24, or 36 months (longer terms often have lower rates)
- Fixed Energy Rate: Set price per kWh (e.g., $0.08/kWh) that never changes during the term
- TDU Delivery Charges: Regulated pass-through fees from your transmission utility (Oncor, CenterPoint, etc.)
- Early Termination Fee: Penalty ($150-$500) if you cancel before the contract expires
- Renewal: Contract expires and rolls to month-to-month variable rate unless you renew
Example: A 24-month fixed-rate contract at $0.08/kWh means you pay $0.08 per kWh for energy charges for the entire 24 months, regardless of whether wholesale ERCOT prices rise to $0.12/kWh or fall to $0.05/kWh.
How Indexed-Rate Electricity Works
Indexed-rate contracts (also called "wholesale" or "pass-through" contracts) tie your electricity rate to the ERCOT wholesale market:
Indexed-Rate Contract Structure:
- Wholesale Price: Based on average ERCOT real-time market prices for the month
- Fixed Markup: REP adds a fixed margin (e.g., $0.015-0.025/kWh) to cover costs and profit
- Monthly Variability: Your rate changes every month based on wholesale market conditions
- No Contract Term: Month-to-month, cancel anytime without penalty
- TDU Delivery Charges: Same regulated pass-through fees as fixed-rate contracts
Indexed Rate Volatility Example
Spring (Low Demand): Wholesale = $0.04/kWh + $0.02 markup = $0.06/kWh (30% savings vs fixed)
Summer (High Demand): Wholesale = $0.12/kWh + $0.02 markup = $0.14/kWh (75% increase vs spring)
Winter Storm (Extreme Event): Wholesale = $0.50/kWh + $0.02 markup = $0.52/kWh (550% spike)
Fixed vs Indexed: Pros and Cons Comparison
| Factor | Fixed-Rate | Indexed-Rate |
|---|---|---|
| Price Predictability | ✓ Excellent - same rate every month | ✗ Poor - varies monthly |
| Budget Certainty | ✓ High - easy to forecast costs | ✗ Low - unpredictable bills |
| Savings Potential | ~ Moderate - locked at market rate when signed | ✓ High - can save 20-40% during low wholesale periods |
| Risk Exposure | ✓ Low - protected from price spikes | ✗ High - exposed to extreme price events |
| Flexibility | ✗ Locked in - early termination fees apply | ✓ Month-to-month - cancel anytime |
| Best For | Businesses prioritizing stability and risk aversion | Sophisticated buyers who monitor markets and tolerate risk |
Which Contract Type is Right for Your Business?
Choose based on your business's risk tolerance, budget flexibility, and energy management sophistication:
Choose Fixed-Rate If:
- ✓ You need predictable monthly electricity costs for budgeting
- ✓ You're risk-averse and want protection from price spikes
- ✓ You don't have time to monitor wholesale ERCOT market prices
- ✓ Your business operates on tight margins with limited cash flow flexibility
- ✓ You prefer "set it and forget it" electricity management
Best for: Small to mid-sized businesses, retail stores, restaurants, offices, and any business prioritizing budget stability.
Choose Indexed-Rate If:
- ✓ You have flexible budgets and can tolerate monthly bill variability
- ✓ You actively monitor ERCOT wholesale market trends
- ✓ You're willing to accept risk for potential 20-40% savings during low-price periods
- ✓ You can shift high-usage operations to low-price periods (demand response)
- ✓ You have strong cash reserves to absorb price spikes
Best for: Large industrial facilities, data centers, sophisticated energy buyers, and businesses with dedicated energy management teams.
Hybrid Strategy: When to Use Each Contract Type
Sophisticated Texas businesses use a hybrid approach, switching between fixed and indexed contracts based on market conditions:
Strategic Contract Timing:
- Wholesale ERCOT prices are historically low (spring, fall)
- Natural gas prices (primary fuel for Texas electricity) are low
- Weather forecasts predict mild conditions (low demand)
Action: Ride indexed rates during low-price periods to maximize savings.
- Wholesale prices start trending upward
- Summer or winter extreme weather forecasts emerge
- Natural gas prices spike
- Fixed-rate offers are competitive with current indexed rates
Action: Lock in fixed rates before price spikes hit.
Note: This strategy requires active market monitoring and the flexibility to switch contracts. Most businesses lack the resources for this approach and default to fixed rates for simplicity.
Frequently Asked Questions
Can I switch from indexed to fixed (or vice versa) mid-contract?
Fixed-rate contracts have early termination fees, so switching mid-term costs money. Indexed contracts are month-to-month, so you can switch to fixed anytime without penalty. This flexibility is one advantage of indexed rates.
What percentage of Texas businesses use indexed vs fixed rates?
Approximately 85-90% of Texas businesses use fixed-rate contracts for budget certainty. Indexed rates are more common among large industrial facilities (over 1 million kWh/month) with dedicated energy management teams.
Are indexed rates the same as variable rates?
Not exactly. Indexed rates are tied to transparent wholesale ERCOT prices (you can verify the math). Variable rates are set by the REP each month with no transparent formula—REPs can change variable rates arbitrarily, making them riskier than indexed rates.
Find the Right Contract Type for Your Business
Choosing between fixed and indexed electricity rates depends on your business's risk tolerance, budget flexibility, and energy management sophistication. Power My Business helps you evaluate both options and negotiate the best rates for your needs.