Ofgem has announced energy bills will rise 5% for households sitting on the energy price cap. In this guide, we talk about the tariff options currently available on the market, and how they may help you to save money.
We are now two years into the energy crisis. Since the seismic event began in 2021, there haven’t been many ways to save money by switching energy deal. Instead, the majority of households have been stuck on the Ofgem energy price cap, as firms have pulled their competitive fixed deals.
Apart from the recent spike which forced up the January Ofgem cap, wholesale prices are generally lower than they were at the height of the energy crisis and bills look set to go down slightly in 2024. But they are still much higher than they were pre-crisis. If you’re struggling to pay, visit our energy bills help guide.
So, what are the main types of tariff – and how do they work? Here’s a quick rundown of what you’ll find and whether they are better suited to your budget and lifestyle.
Standard variable tariff
Also known as a ‘default’ tariff, this is the rate you will be put on if:
- Your energy fix has expired
- You’ve moved into a new home
- You have never switched supplier before
Standard variable tariffs have had their unit rates and standing charges capped by Ofgem since 2019, with the original intention having been to protect consumers from unfair pricing. The cap has since become the de facto energy bills rate because wholesale costs grew so massively in 2021 and 2022 that suppliers could no longer compete on fixed rate tariffs (more on those below). These costs have continued to remain above historical averages.
Positives:
- Given default tariffs don’t come with a contract, they have no exit fees. So, you can sign up to a different tariff or switch provider at any time without a financial penalty.
Negatives:
- When the market gets properly competitive again, this kind of tariff is likely to be more expensive than a fixed-rate deal.
- Costs can go up when wholesale prices rise. This can happen every three months, which makes budgeting a challenge.
Before the energy crisis, we would have told you to switch away from a standard variable tariff to a fixed deal to save £100s. But the market is not as simple as that anymore. Our energy comparison article explains what you now need to consider before switching.
There is one relatively new type of variable tariff that’s worth mentioning – the tracker tariff. These follow wholesale prices, and can go up or down daily or hourly. They can even sometimes turn negative, which means you will effectively get paid to use energy. Octopus Agile and Octopus Tracker are two versions of this sort of tariff.
Fixed energy tariff
Fixed-rate tariffs bind you into a contract that locks in what you’ll pay for unit rates and standing charges over a set period of time. So, unlike a standard variable tariff, your bills will remain the same regardless of fluctuations in the wholesale energy market.
Pre-energy crisis, suppliers tended to compete to offer the cheapest fixed deals and switching was commonplace. But the market is now very sluggish given the uncertainty over medium-to-long-term wholesale prices.
Positives:
- In the current energy market conditions, the big benefit of a fixed rate tariff is that it provides budget certainty, so you’ll know exactly what you’ll be paying for your energy bills over the next year or more.
- Your bills will still fluctuate seasonally given you’re likely to use more energy in winter than in summer (you can see how to cut your gas and electricity usage in this handy guide). But there will be no sudden shocks like the ones we’ve seen over the last two years.
Negatives:
- At present, fixes don’t offer the same savings you used to get pre-crisis.
- Given the uncertainty around how energy prices will change in 2024, fixing now could mean you’ll end up paying higher prices for longer if wholesale costs fall.
- Fixes come with hefty exit fees. So it usually won’t be viable to switch if you want to ditch your contract early to take advantage of lower energy prices elsewhere.
If you do opt for a fix, Ofgem rules state that you should get a 14-day cooling off period after signing up for it. It means you won’t be charged any exit fees if you change your mind about fixing. Exit fees also can’t be applied if you switch suppliers less than 49 days before the end of the contract. Where exit fees do apply, it could still be worth taking the hit if the savings you’d make through switching are greater than the exit fee being charged.
Time of use tariffs
This kind of tariff will offer you cheaper unit rates for your power at ‘off-peak’ times of the day, i.e. when energy use is at its lowest. Some of these tariffs may also offer beneficial rates when renewables are producing a glut of energy.
To be eligible, you will need a smart meter. Your energy supplier will work out how much you’ve used during on- and off-peak periods by analysing the readings it has collected from your smart meter. Off-peak times usually fall: during weekday working hours, late at night/in the early hours of the morning, and at weekends.
Positives
- You have the chance to save £100s a year if you’re able to use energy-intensive appliances at off-peak times.
- They can reduce emissions. By helping to balance UK demand, they can reduce the need for fossil fuel power generation at peak times.
Negatives
- Time of use tariffs are great if you can be flexible with your energy usage. But this may not be advantageous for everyone – for example, if you have a young family or work unusual hours.
- Some appliances, such as tumble dryers, should never be used when you’re asleep due to their fire risk – so you may be limited on how much you can save.
Households with economy 7 or economy 10 meters will also get discounted rates during set off-peak times (usually in the middle of the night). If you’re unsure how to read this type of meter, take a moment to check out the Look After My Bills guide to meter readings.
National Grid’s Demand Flexibility Service – a tariff add-on available from most UK suppliers – also works in a similar way to TOU tariffs but offers more limited savings. It usually kicks in at peak times when energy usage is exceptional, something that tends to happen in the depths of winter. The National Grid also runs test events for it that offer slightly lower savings.
Electric vehicle (EV) tariffs
Similar to the time of use tariffs mentioned above but specifically designed for owners of electric vehicles, EV tariffs offer reduced electricity unit rates at off-peak times (usually overnight). The amount of time you’ll get cheap energy for tends to be shorter than for a general time of use tariff.
Positives:
- You will be able to save £100s a year compared to a regular tariff, if you charge your EV regularly.
- Most deals allow you to use other energy-intensive appliances at the same cheaper rate during the allotted off-peak hours.
- As with time of use tariffs, you’re also helping to balance demand on the National Grid, which means you’re likely to be reducing the need for fossil fuels.
Negative:
- These tariffs are pricier at peak times, so you need to try and reduce your use when rates are more expensive.
- Some of these tariffs are only available if you have a certain make of car or specific chargers. Most firms will ask you to prove to the supplier that you own an electric car or van before they let you sign up.
Prepayment tariff
Also known as a ‘pay as you go’ tariff, this kind of energy product is only available to those who have a prepayment meter. These meters are usually found in households that have struggled to keep up with their energy bills or have a significant energy debt, or just want more of a control on their energy spending.
Customers on prepayment tariffs pay for their energy and standing charges before using it, by topping up their credit on the meter using a token, key or payment card. You can also now add credit to them via an app or online depending on which supplier you’re with.
Positives:
- This type of meter will allow you to budget more easily as you pay in advance.
- You will also be able to tightly control how much you spend on your energy – although there is a risk that you will be left without power if you run out of funds.
- There is no longer a premium on price cap rates as the Government is part-subsidising them so that they’re either equal to or cheaper than direct debit standard credit meter rates.
Negatives:
- There are usually fewer tariff options open to you compared to a standard credit meter, so you could be missing out on cheaper fixed deals.
- You have to top up your meter regularly. If you don’t have a smart prepay meter, this’ll mean a trip to the local shop.
If you move into a home that has a prepayment meter fitted and you would rather be on a standard meter, most of the major energy suppliers will send an engineer around to switch you over for free. If you’re renting, be sure to ask for the landlord’s permission first.
Green energy tariff
A green tariff is one that will claim to provide energy from 100% renewable sources. In theory, you will be powering your home with electricity produced by wind or solar farms. Renewable gas may also be available, although biogas generators are not common in the UK.
Positive:
- If you’re concerned about the climate crisis, green tariffs are a way of boosting investment in renewables.
Negatives:
- While providers may claim to be providing entirely renewable energy, the fact is that the supply coming into your home is going to come from a variety of sources because (unless you live off-grid) you will be getting power directly from the National Grid
- It is also worth checking the small print to see whether your supplier is actually generating renewables. Some may be buying renewable obligation certificates (ROCs) or renewable energy guarantees of origin (REGO) certificates – i.e. schemes run by specialist companies that either offset emissions or themselves generate energy from renewable sources. These allow them to claim they are 100% renewable, while the reality is somewhat different.
