The Pros and Cons of Variable-Rate Energy Plans in Today's Market

When shopping for commercial energy in Illinois, one of the fundamental decisions you'll face is whether to lock in a fixed rate or ride the market with a variable-rate plan. Fixed rates offer predictability—you know exactly what you'll pay per kilowatt-hour for the life of your contract. Variable rates offer the potential for savings when markets are favorable—but also expose you to price spikes when conditions change.

Neither approach is inherently better; the right choice depends on your business's risk tolerance, budget flexibility, market timing, and energy management capabilities. This guide will help you understand both options deeply and make an informed decision for your Illinois commercial energy needs.

Riding the Lows: How Variable Rates Can Slash Your Illinois Commercial Energy Bill

Variable-rate plans (also called indexed, floating, or month-to-month plans) tie your energy price to wholesale market conditions. When markets are favorable, variable rates can deliver substantial savings compared to fixed-rate alternatives.

How Variable Rates Work

Most variable-rate commercial contracts calculate your price using a formula based on wholesale market indices:

• Index-based pricing: Your rate equals a published market index (like PJM day-ahead prices) plus a fixed adder that covers the supplier's margin and administrative costs
• Monthly adjustment: Your rate changes each month (or sometimes each day) based on the index
• Pass-through structure: Wholesale costs are passed through directly, with transparency about what the supplier adds

When wholesale prices drop—as they did during periods of abundant natural gas supply and mild weather—variable rate customers benefit immediately.

When Variable Rates Shine

Falling or stable market conditions: If wholesale prices are declining or expected to remain low, variable rates capture those savings that fixed-rate customers locked in at higher levels miss.

Short-term flexibility needs: If you're uncertain about your business's future energy needs—perhaps you're expanding, relocating, or implementing major efficiency improvements—variable rates provide flexibility without long-term commitments.

Sophisticated energy management: Businesses that actively manage their consumption in response to price signals can optimize their costs under variable pricing, shifting usage to lower-cost periods.

Off-peak dominated operations: If your business operates primarily during nights and weekends when wholesale prices are typically lowest, variable rates may consistently beat fixed alternatives.

Historical Context

According to data from the U.S. Energy Information Administration, wholesale electricity prices in the PJM region have experienced significant volatility over the past decade. During periods of mild weather and low natural gas prices, variable rate customers have seen some of the lowest energy costs available. However, these same customers faced steep bills during polar vortex events and heat waves.

The Volatility Trap: Are You Prepared for Sudden Spikes in Your Energy Costs?

The flip side of variable-rate opportunity is variable-rate risk. Price spikes can be sudden, severe, and devastating to business budgets.

What Causes Price Spikes?

Extreme weather: Polar vortex events in winter and heat domes in summer drive massive demand increases. During the February 2021 Texas grid crisis, wholesale prices briefly exceeded $9,000 per MWh—compared to typical prices of $30-50 per MWh. While Illinois wasn't as severely affected, PJM prices also spiked significantly during that period.

Natural gas price volatility: Since natural gas fuels a large portion of electricity generation, gas price spikes translate directly to electricity price increases. Global LNG demand, domestic production disruptions, and storage levels all influence prices.

Generation outages: When power plants go offline unexpectedly—due to equipment failures, fuel supply issues, or maintenance delays—reduced supply pushes prices higher.

Transmission constraints: When electricity can't flow freely across the grid due to congestion, local prices can spike even when overall supply is adequate.

The Budget Impact

Consider a manufacturing facility using 200,000 kWh monthly:

• Normal variable rate: $0.055/kWh = $11,000 monthly
• Spike month rate: $0.15/kWh = $30,000 monthly
• Impact: $19,000 unexpected cost increase

For businesses operating on thin margins, a single spike month can wipe out profits accumulated over many months of low rates.

The Psychological Burden

Beyond financial impact, variable rates create ongoing uncertainty:

• Difficulty accurately budgeting for energy costs
• Time spent monitoring market conditions and worrying about spikes
• Pressure to make reactive decisions during volatile periods
• Explaining cost variations to management or stakeholders

Fixed vs. Variable: A Decision Framework for Illinois Business Owners

Use this framework to evaluate which approach best fits your business:

Consider Fixed Rates If:

• Budget certainty is essential: Your business requires predictable costs for planning, pricing, or stakeholder reporting
• You have low risk tolerance: Unexpected cost spikes would create serious financial or operational problems
• Energy is a major cost: When energy represents a significant portion of operating expenses, the risk of spikes becomes proportionally more dangerous
• You lack time/expertise for active management: Fixed rates are "set and forget"—you don't need to monitor markets or adjust behavior
• Current fixed rates are attractive: If market conditions allow you to lock in historically low fixed rates, the certainty may outweigh speculative upside

Consider Variable Rates If:

• You can absorb cost swings: Your business has sufficient margin or cash reserves to weather temporary price spikes
• You believe markets will decline: If you have conviction that current fixed rates are high relative to where the market is heading, variable exposure captures the benefit
• You actively manage consumption: If you can shift usage in response to prices—reducing consumption during high-price periods—you can mitigate spike exposure
• You need contract flexibility: Variable plans typically have shorter terms or easier exit provisions than fixed contracts
• You have sophisticated procurement: Large enterprises often use variable pricing for a portion of their load while hedging through other mechanisms

The Hybrid Approach

Many businesses find that a hybrid approach balances the benefits and risks of both options:

Partial fixed, partial variable: Lock in fixed rates for a portion of your load (perhaps 60-80%) while leaving the remainder exposed to variable pricing. This provides budget stability for most of your consumption while maintaining some market upside.

Block and index: Purchase fixed "blocks" of energy at set prices while paying market index rates for any consumption above or below those blocks.

Layered fixed contracts: Rather than fixing all your energy at once, layer in fixed contracts over time—locking in 25% of your supply each quarter, for example—to average out your purchase price.

Taming the Market: 3 Expert Strategies for Managing Your Variable-Rate Plan

If you choose variable rates, these strategies help manage the associated risks:

Strategy 1: Set Price Triggers and Response Plans

Don't wait for a crisis to decide how you'll respond to price spikes:

• Establish price thresholds: At what price level will you take action? (e.g., "If my rate exceeds $0.10/kWh, we activate our conservation protocol")
• Create response protocols: What specific actions will you take at each threshold? (e.g., reduce HVAC setpoints, delay production runs, curtail non-essential equipment)
• Assign responsibility: Who monitors prices and makes the call to activate response plans?
• Test your response: Run drills to ensure staff understand and can execute the protocols

Strategy 2: Consider Price Caps and Hedges

Some variable contracts include mechanisms to limit extreme exposure:

• Price caps: Your rate can float within a range but won't exceed a maximum price. You pay slightly more for this protection, but it prevents catastrophic spikes.
• Collar structures: Your rate floats between a floor and ceiling—you give up some downside benefit in exchange for upside protection.
• Financial hedges: For sophisticated enterprises, purchasing electricity futures or options can offset physical market exposure.

Discuss these options with your energy broker or supplier—not all offer them, but they're increasingly available in the commercial market.

Strategy 3: Maintain Switching Flexibility

Keep your options open:

• Short contract terms: Variable contracts with month-to-month or short-term provisions allow you to switch to fixed rates if market conditions change
• Monitor fixed rate trends: Even while on variable pricing, track what fixed rates are available so you know when locking in becomes attractive
• Set "lock-in" triggers: Decide in advance what fixed rate would be attractive enough to switch from variable (e.g., "If I can lock in below $0.06/kWh for 24 months, I'll take it")

Making Your Decision

The variable vs. fixed decision isn't permanent—you can adjust your approach as market conditions, business circumstances, and your own experience evolve. Start with an honest assessment of your risk tolerance and budget constraints, then choose the approach that best fits your situation.

For many Illinois businesses, especially those prioritizing budget stability, fixed rates provide peace of mind that outweighs potential variable-rate savings. For others with higher risk tolerance and active management capabilities, variable rates offer opportunities to reduce costs in favorable markets.

Whatever you choose, understanding both options deeply ensures you're making an informed decision rather than simply defaulting to whatever a salesperson offers.