Fixed or floating? It’s not just a question for homeowners looking for a new mortgage. Given the ever-present threat of power price hikes, being able to lock in a long-term fixed-rate power plan can be an appealing prospect. But is it likely to deliver you savings? Canstar looks at the pros and cons of fixed-rate power plans.
Fixed-rate power plans can be reassuring. They deliver certainty around power costs over the course of a contract. However, it’s important to keep in mind they do not automatically equate to long-term savings.
With the price of your power locked in, your plan will effectively be cocooned from the ebbs and flows of the wider market, and in particular price hikes. However, before committing for the long term, it’s important to assess all the details of a plan. This includes how competitive the rate is, along with any other discounts or fees that might apply.
As a starting point, it’s certainly worthwhile looking at the various fixed-rate plans on offer from power companies in your area. Then you need to weigh up the different pros and cons (read on for a rundown) according to your household’s requirements.
What is a fixed-rate power plan?
A fixed-rate plan sees power companies lock in a per unit (kWh) rate for electricity that applies over the course of an entire contract. These types of contracts can run from six months up to three years.
Variable-rate plans do not require consumers to commit to a contract. As a result, retailers can change their rates whenever they want, but customers have the choice to switch to a different power company.
To summarise the differences between these two types of plans:
- Fixed-rate – a set per unit rate, and a long-term contract commitment
- Variable – rates are subject to change, however consumers are free to shop around
It’s important to keep in mind that many fixed-rate plans include a break fee that applies if a contract is terminated early. If you’re signed to a long-term contract and do want to change retailers, the Electricity Authority advises that it’s still worth talking to your retailer about how the fee applies. You never know, they might be able to offer you a better deal.
Fixed-rate power plans: the finer details
To understand how charges are applied under a fixed-rate plan, it is important to know how power bills are structured. This includes how the various components of your bill add up over the course of each billing period.
Once you’ve broken down the different elements of your bills, it will be easier to pinpoint the potential benefits different plans can offer.
Most power bills include the following costs:
- Fixed charges – a fixed amount charged each day, regardless of how much power is used (also known as daily costs)
- Variable charges – the charge for the actual kWh of power used
- Electricity Authority Levy – this is usually based on how much power a household uses. It funds the Electricity Authority’s work to regulate the electricity industry
Under fixed-rate plans, variable charges are locked in (the per kWh cost). However it’s also important to consider how the other elements of your bill will contribute to total costs.
For instance, confirm if the fixed charges (daily costs) component of your power bill will also be set. This will help to determine the approximate percentage of your bill that will have a fixed rate applied to it over the course of a contract.
It’s also important to factor in any other fees, charges, discounts or promotional offers that apply. As these can impact the bottom line.
Once you have this information at hand, you can then run the numbers on different power company plans (some retailers may offer cost calculators), and weigh up what will be best for your household. If you have access to previous bills, this will certainly help more accurately forecast your future bills.
Fixed-rate power plan pros and cons
Of course, determining whether a fixed-rate plan is a viable option for your household depends upon a range of factors. For instance, if you’re renting, or if your circumstances are likely to change in the short-term, a variable-rate plan might be the better option.
Meanwhile, if you’re a home-owner, or have committed to a long-term rental contract, a fixed-rate plan may tick a number of boxes.
Fixed-rate plan pros:
- Can provide certainty – if you’re keen to budget for the long-term, a fixed-rate plan can provide pricing certainty and allow for more accurate cost forecasting
- Lock it in – if you’re not inclined to actively monitor the market for deals, a fixed-rate plan could be appealing
- Price rises – if prices rise over the course of your contract, your rate will be locked in
Fixed-rate plan cons:
- No switching – once locked into a contract, you’ll not be able to easily switch retailers should a better offer arise
- Break fee – if you terminate your contract before its expiration, you’ll likely pay a break fee
- Price falls – if prices fall over the course of your contract, you could end up paying more
Which way are prices headed?
It can often help to look to the past in planning for the future. The following government figures provide a window into the movements of residential power prices over the past few years.
The following data tracks the real national residential electricity cost per unit and annual percentage change, along with real average expenditure per household per year, over a five year period from 2016-20.
|Year (to March)||Cost per unit (c/kWh)||Annual change in cost per unit (per cent)||Average expenditure per household per annum|
Costs include discount costs, such as prompt payment discounts, and GST.
As these numbers reveal, there’s no guarantee that prices will rise in a linear manner. Prices can rise and fall from one year to the next.
With prices varying region by region, it is worthwhile comparing the range of rates, and different types of deals, on offer from power companies in your area. And, as part of this process, it’s important to identify the potential benefits a fixed-term plan could deliver over other types of plans.
Shopping around will help to narrow down the best options for your household, and if in doubt follow up with power companies before making a commitment.
If you’re interested in finding a better power deal. A great way to start is by checking out Canstar’s latest Star Ratings awards, which rate NZ power companies for customer satisfaction and value for money. See the table below for some of the results, or click on the button below for the full results of our survey.
Canstar Blue’s latest review of NZ power companies compares them on customer satisfaction. The table below is an abridged version of our full results, available here.
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Canstar Blue NZ Research finalised in May 2020, published in June 2020.
See Our Ratings Methodology