Cash-strapped households can expect cheaper energy bills following the energy price cap dropping below the government’s Energy Price Guarantee (EPG) from July 2023.
The Energy Price Cap now takes the typical average energy bill to £2,074 – 17% (£426) below current rates, and this could see a return of cheap fixed energy deals. But is a fixed deal better?
As wholesale energy prices soared, fixed deals quickly disappeared from the market, and meant many suppliers went out of business. This all meant that contrary to usual money saving advice, sticking with your supplier’s standard default tariff was the best, and cheapest option, especially with the protection afforded by the energy price cap and then the energy price guarantee.
The new price cap will affect the price we pay for our energy from 1 July until 30 September and the average typical bill will be £2,074 a year from July. That’s nearly £450 lower than the current EPG level of £2,500. This figure is based on a typical dual fuel bill with direct debit payment.
However this does still mean that average household energy bills have more than doubled, since the energy price cap was introduced back in 2019.
Will we see the return of fixed energy price deals?
Households have had increased protection against rising energy prices under the EPG, but now that the energy price cap is lower than the EPG, providers are expected to bring back cheaper fixed deals.
The price cap sets a maximum to the price suppliers can charge consumers for each unit of energy they use, along with standing charges. It’s set four times a year and affected by the wholesale gas prices.
However there is no cap on your overall bills under either the energy price cap, or energy price guarantee – the cap is on the unit rates, so the rate you pay depends on your usage.
Cornwall Insight says energy prices are starting to stabilise, which could “prompt energy suppliers to introduce fixed-rate tariffs aligned with or close to the price cap, as they become less apprehensive about the possibility of a sudden surge in energy prices”.
Dr Craig Lowrey, principal consultant at Cornwall Insight, said: “This potential re-emergence of competitive tariff propositions presents an opportunity for households to finally get a grip on their energy bills, having been hit hard by the energy crisis.”
Cornwall Insight is expecting the price cap to fall again for the period from October to December – which could mean average annual household energy bills of £1,975, before rising slightly from January to March 2024 with bills around £2,044.
Should I fix my energy deal?
Right now you still can’t sign up for fixed energy deals, although many of the comparison sites are offering eager switchers the opportunity to leave their details so they’re first in line for alerts when new deals land on the market.
Earlier this year Ovo Energy was offering existing customers a deal just below the EPG, which would have meant an average saving of £225 on their annual bills compared with the energy price guarantee.
Research from uSwitch suggests fixed energy deals for the average household could start from around £2,200 a year, based on a dual fuel deal, with typical usage.
However, even if deals do return to the market, you may have to make a choice over whether you are prepared to lock into one as soon as possible, or hold out longer, in the hope of securing even cheaper fixes if the price cap continues to fall.
Lowrey said: “there is always a risk in fixing energy tariffs as bills may reduce further leaving customers locked in at higher-than-market rates for a fixed duration. Additionally, we must recognise these prices are still £1,000 more than households were paying prior to the pandemic.”
What to think about before signing up for a fixed deal
You might feel like snapping up the first cheaper fixed energy deal that comes out, but it is worth remembering that the energy market is volatile and we don’t know where prices will go this year. They could drop further but they could also rise.
When fixed rate deals start to come out, it may be worth comparing the price you’ll pay for your annual bills under the fix, based on current energy usage, compared with the way energy prices are expected to fall for the rest of the year.
Richard Neudegg, director of regulation at Uswitch, said: “If wholesale prices continue to drop, the next price cap in July could be cheaper, meaning we’ll go back to Ofgem dictating default tariff prices every quarter.
“We see no reason why suppliers can’t take advantage of the lower wholesale prices and start offering fixed deals that are below the Energy Price Guarantee.”
What can I do if I’m struggling to pay my energy bills?
Even if energy prices do start to come down, this doesn’t mean cheap bills overnight and there may still be many households who will struggle to pay their energy bills. If this is the case, you should speak to your supplier.
Under the terms of their licence agreement with Ofgem, suppliers have a responsibility to work with customers who are struggling to make payment, which could mean allowing them to temporarily suspend payments or reduced payment plans, along with having access to grants or financial hardship funds.
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.
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.
Variable tariffs – the bad bits
On the flip side, if wholesale prices go up then so too will your energy bill.