Fixed vs Variable Rate Natural Gas Contracts: Which Is Right for Your Business?

Understanding Fixed Rate Contracts

A fixed rate contract locks in your per-therm or per-CCF price for the duration of the agreement, typically 12-36 months. Regardless of market fluctuations, your commodity rate remains constant.

How Fixed Rates Work

When you sign a fixed rate contract, the supplier purchases or hedges the gas needed to serve your account at current market prices. They then add a margin and offer you a locked-in rate. Your rate won't change even if market prices rise or fall significantly.

Advantages of Fixed Rates

• Budget Certainty: Know exactly what you'll pay for gas each month
• Price Protection: Shielded from market spikes and winter price increases
• Simplified Planning: Easier to forecast and budget energy costs
• Peace of Mind: No need to monitor market conditions

Disadvantages of Fixed Rates

• Premium Pricing: Fixed rates typically include a risk premium
• Missed Savings: Won't benefit if market prices drop
• Early Termination Fees: Locked in for the contract term
• Timing Risk: May lock in at unfavorable market levels

Understanding Variable Rate Contracts

Variable rate contracts adjust monthly based on market conditions. Your rate fluctuates with wholesale natural gas prices, typically tied to an index like NYMEX or a regional benchmark.

How Variable Rates Work

Each month, your rate is calculated based on the current market price plus a fixed margin. When wholesale prices are low, you pay less; when they're high, you pay more. Some variable contracts have caps or floors that limit extreme movements.

Advantages of Variable Rates

• Lower Average Cost: Often cheaper over time than fixed rates
• Flexibility: Can switch suppliers or rate structures more easily
• Market Participation: Benefit when prices drop
• No Timing Pressure: Don't need to time the market perfectly

Disadvantages of Variable Rates

• Price Volatility: Bills can vary significantly month to month
• Budget Uncertainty: Harder to forecast energy costs
• Winter Risk: Prices typically spike during cold weather
• Requires Monitoring: Should track market conditions

Side-by-Side Comparison

Factor	Fixed Rate	Variable Rate
Budget Certainty	High	Low
Price Protection	Yes	No (unless capped)
Savings Potential	Limited	Higher
Risk Level	Low	High
Flexibility	Low	High
Management Required	Minimal	Active
Best For	Risk-averse, budget-focused	Risk-tolerant, cost-focused

Hybrid Options: Block and Index

Some suppliers offer hybrid structures that combine elements of fixed and variable pricing:

Block and Index

A portion of your usage is priced at a fixed rate (the "block"), while the remainder floats with the market (the "index"). This provides partial price protection while maintaining some market exposure.

Capped Variable

A variable rate with a maximum price cap. You benefit from low market prices but are protected from extreme spikes. The cap typically comes with a small premium.

Layered Fixed

Instead of locking in all your usage at once, you fix portions at different times to average your costs. This reduces timing risk while maintaining budget certainty.

Which Is Right for Your Business?

Choose Fixed Rates If:

• Budget certainty is a top priority
• You have limited tolerance for cost volatility
• Energy is a significant portion of operating costs
• You don't have resources to monitor markets
• You're signing during favorable market conditions

Choose Variable Rates If:

• You can tolerate some cost fluctuation
• You believe prices will remain stable or decline
• You want flexibility to switch suppliers
• Energy is a smaller portion of operating costs
• You can actively monitor market conditions

Consider Hybrid Options If:

• You want partial price protection with some market exposure
• You have large, predictable base load usage
• You want to hedge timing risk
• You're comfortable with moderate complexity

Industry-Specific Considerations

Manufacturing

Manufacturers with consistent, high-volume usage often benefit from fixed rates that provide cost certainty for production planning. However, those with flexible production schedules may prefer variable rates.

Retail and Hospitality

Businesses with thin margins often prefer fixed rates to maintain predictable operating costs. Seasonal businesses may benefit from variable rates during off-peak periods.

Healthcare

Healthcare facilities typically prioritize budget certainty and choose fixed rates. The predictability helps with financial planning and rate-setting.

Commercial Real Estate

Property managers often prefer fixed rates for easier budgeting and tenant billing. However, those who pass through energy costs may be more comfortable with variable rates.

Get Personalized Advice

The right rate structure depends on your specific situation, risk tolerance, and market conditions. Contact our team for a free consultation to determine which option best fits your business.