Thrifty Tony

Should You Choose a Fixed or a Variable Rate Electricity Plan?

Fixed vs variable electricity rates

I have a super analytical brain, so when I moved to Arizona a few months ago and was presented with the option to choose between a fixed electricity rate or a variable rate that depends on what time of day I consume the most power, I knew right away that I needed more information to make an informed decision.

In this blog post, I’ll be walking you through the basic differences between fixed and variable electric rates, and we’ll analyze my actual usage over the past 6 months to determine which option is more cost effective.

Types of Electricity Rates

I get my electricity from Tucson Electric Power (TEP), and while they have a tool on their website that compares the different pricing plans, you need at least 12 months of account history to use it, so that’s part of the reason I decided to crunch these numbers myself. At TEP, there are actually 4 different pricing plans. 

  1. Basic
  2. Time of Use
  3. Peak Demand
  4. Demand Time of Use

I’ll be the first to admit is super confusing, but after reading through the literature for each one of them, I determined that the Basic plan is fixed rate while the Time of Use plan is variable rate.

We’re not even going to look at Peak Demand and Demand Time of Use since these plans are dependent on your highest hourly usage during on-peak hours which is just too complicated.

Fixed vs Variable Electricity Rates

Let’s focus on simply comparing the fixed rate plan with the variable rate plan to see which is most cost effective.

Power Supply Charges

As you might guess, the fixed rate plan has a single power supply charge per kWh for the summer, and one for the winter.

On the other hand, the variable rate plan has on-peak hours which correspond to a higher rate. During the summer, on-peak hours are from 3pm to 7pm and during the winter, on-peak hours are from 6-9am and 6-9pm, Monday through Friday.

Comparison of fixed and variable electric rates in Tucson, AZ

The attractive aspect of the variable rate plan is the fact that the rate you pay during off-peak hours is cheaper than the rate you pay for the fixed rate plan. At the same time, you are essentially penalized with a higher rate when you consume electricity during on-peak hours.

Energy Charges

In addition to power charges, there’s also energy charges which charge you a certain rate for the first 500 kWhs, the second 500 kWhs, and everything else after that.

Fixed vs variable energy charges for Tucson, AZ

The surprising difference between these plans is the fact that the energy rate for the variable plan is actually higher than the fixed plan for the first 500 kWhs. Other than that, everything else is the same.

Example Assuming Constant Energy Usage

Now, most people who are willing to shift their high-power usage (like laundry and air conditioning) to off-peak hours assume that the variable rate plan would ultimately be cheaper for them, and that’s what we’re here today to put to the test.

Okay, for simplicity sake, let’s assume that you use a constant amount of power each hour throughout the month.

During the summer, you’d have to use over 3,000 kWhs of electricity in order to benefit from the variable rate plan.

On the other hand, in the winter, the break even point is less than 1,000 kWhs.

To put this into perspective, during the hottest summer month here in Tucson Arizona, I consumed at most 1,300 kWhs to cool my 1,200 square foot house, and during the winter, my usage has dropped below 500 kWhs.

This is mostly because the difference between the on-peak hours rate and the fixed rate during the summer months is much greater than the difference in the winter months. In other words, electricity is really expensive in the desert during the summer.

Analyzing Actual Energy Usage in Tucson

Now more realistically, you aren’t going to use a constant amount of electricity every hour during the month, so next let’s take a look at my actual usage since moving to Arizona.

Since Tucson Electric Power gave me a spreadsheet with my hourly electricity usage every month since opening my account, it was actually quite trivial to plug in the variable electricity rates and determine what I would have spent if I initially chose that plan.

Without considering any taxes or fees, here is my actual usage and cost of electricity with the fixed rate plan vs what I would have spent with a variable rate plan.

The variable rate electricity plan would have cost me slightly more than the fixed rate plan.

As you can see in July, I would have spent more with the variable rate plan. Same thing in August and September. October was exactly the same cost either way. And finally, the fixed rate plan was also cheaper for me in November and December.

I’m actually quite surprised that these numbers are so close to each other, just separated by a matter of a few dollars at most.

Bottom Line

The key takeaway here is that the variable rate plan will save you money on your electricity bill if you avoid high energy consumption during on-peak hours.

Also, it’s somewhat counterintuitive, but the more electricity you use, the more you’ll benefit from the variable rate plan.

Thrifty Tony

Thrifty Tony

Tony approaches most things in life with a budget-conscious mindset while at the same time maximizing investments which results in an ideal balance between spending and saving. And of course he enjoys free things and bonuses every now and then.