Fixed vs variable tariffs: Is fixed better?


This is an old article and may have reference to switching energy deals. Sadly, most people can’t switch to save money so please ignore any switching-related content. However, we’ve kept the article live as there are other important tips for you. But we’ll shortly give it a proper edit so it’s 100% up-to-date.

If energy was like milk then buying it would be much simpler. You’d walk into the shop, ask for a pint litre of electricity, and be told that’s £1.50 please. At which point you might go to the shop next door, where the same electricity is just £1.25 a litre.

Unfortunately, energy isn’t like milk. On the plus side, this means your electricity doesn’t start smelling when you leave it out in the sun for too long, but the downside is that you have to deal with issues like whether to opt for a fixed or variable energy tariff. Of course, many people don’t want to spend their precious leisure time pondering questions like this. They’ve got box sets to watch, gardens to tend to and cutlery drawers to arrange (because let’s be honest, sorting knives and forks is probably more entertaining than thinking about different energy tariff types).

That’s why, according to the energy industry watchdog Ofgem’s ‘State of the Energy Market report for 2018’, 54% of customers have been stuck on expensive default tariffs for more than three years. The difference that Ofgem found between the average price being paid by those customers sticking with the ‘Big Six’ energy suppliers’ default tariffs and those who’d switched to better gas and electricity deals. We realise that percentages and tariffs are actually the kind of words that hypnotists use when they want to put someone into a really deep sleep, so well done for staying with us this far. As a reward for keeping your concentration, we’ll spell it out in more exciting terms:

People who stuck with the tariff their energy supplier put them on lost, on average, £960 over three years.

Did we say exciting? We meant terrifying. Remember, they didn’t get better electricity, five-star gas or premium grade dual fuel. They just paid a lot more for exactly the same thing.

So, the question is, do you go for fixed or variable energy? Or maybe the question is how long can you fix energy costs for? And should you fix energy prices now, or should you fix energy prices until 2021? Which type of tariff is more likely to offer better electricity deals and better gas deals?

What is a fixed tariff?

A fixed rate tariff is essentially a contract you enter into with your energy supplier. Under that contract, the rate you pay per unit of energy will be the same for a set period of time. This will usually be a year or 18 months, though it can be as long as two or three years. This doesn’t mean that the amount you pay will stay the same, of course, since that’ll depend on how much energy you use. It does make costs easier to predict and budget for, however, provided you keep a careful eye on energy usage and on the length of the contract.

What is a variable tariff?

A variable tariff means that the price you pay for each unit of energy can go up and down at any time during your period with a supplier. This will often be linked to a shift in wholesale prices, but not always. The key to a variable tariff is that the supplier can change things whenever they like and for any reason, although they should inform you if prices are set to go up.

Fixed energy tariffs – the good bits

You know exactly where you are with a fixed rate tariff. Even if prices of wholesale energy were to leap up by 10%, the amount you pay for your energy won’t alter as long as you’re on the tariff. Of course, the same applies if the cost of energy drops, but worrying about missing out on a huge drop in the price of gas and electricity is a bit like walking home the long way because you don’t want to miss out on any diamond necklaces that might have been dropped on the pavement (we’re saying it’s not impossible, but it is pretty unlikely).

Fixed rate tariffs are often cheaper than variable rates, and the choice is wide because almost all suppliers offer them. Your supplier has to let you know when there are just 49 days of the deal remaining, and you can switch to another deal during this period without paying an exit fee.

Fixed energy tariffs – the bad bits

If energy prices drop when you’re on a fixed rate tariff then you won’t feel the benefit. Perhaps even worse than this, your friends who didn’t take your advice to sign up to a deal will be incredibly smug about it. Most providers charge an exit fee when you leave a fixed rate contract before it ends. If you’re on a dual fuel tariff this can be as much as £60. Perhaps the biggest downside of a fixed energy tariff that people are most likely to forget about is that when it ends, if you do nothing, your supplier will probably switch you to their default variable rate, which is generally their most expensive.

Variable tariffs – the good bits

If the price of wholesale energy falls, your supplier will probably pass this on in the form of a reduced rate per unit of energy. That means you can consume the same amount for less, or even use a bit more energy without paying higher bills. In addition to this, variable tariffs don’t have exit fees or end dates, leaving you free to switch quickly and easily when you spot a better deal.

Variable tariffs – the bad bits

You may sign on to a variable deal at a highly competitive price, but there’s no guarantee you’ll stay at that price. You’ll need to keep a careful eye on the energy market, and look around for a better deal whenever a price hike is on the way.

On the downside, variable deals often start off with a low price, but there is no guarantee how long it will stay that way. If prices rise, so does the unit rate you pay and therefore your energy bill will go up too.

The overall answer to the conundrum, of course, is to come to Look After My Bills. We’ll weigh up factors like fixed and variable rates, exit fees and special offers, and make sure you’re always on the best energy tariff we have available.

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