When looking at energy tariffs, there are two types of tariffs that the majority of suppliers offer. Namely fixed-rate or variable.
Essentially a fixed rate deal will lockdown your energy unit price (kWh) for a specified period. Often between one and two years.
A variable tariff means that the price can go up and down. A variable tariff is vulnerable to wholesale market pricing. However, you could save on these over a fixed price tariff if prices stay low. Of course, the flip side of this is the price can rise when wholesale prices increase.
We’ve put together this article to explain the difference between fixed and variable energy tariffs and the benefits of both options to help you make the best decision for your energy.
Fixed-rate vs variable rate tariffs
If you’ve been with the same energy supplier for a few years, there is a high chance you will be on their standard variable tariff.
There are sadly no benefits to staying loyal to an energy supplier. Often when you compare these default standard tariffs to a new fixed-rate deal, it will usually be substantially more expensive. This can make variable tariffs appear off-putting.
However, they shouldn’t be entirely discounted. In some cases, there are some very competitive variable tariffs available.
But what are the key differences between and fixed and variable energy tariffs?
Fixed-rate tariff
A fixed price tariff means you enter a contract to pay a set amount per energy unit (kWh) used for a set amount of time. Usually, this is between 1 and 3 years.
However, this doesn’t guarantee your energy bill will cost the same every month. The amount you are billed will still depend on how much energy you use.
Fixed-rate deals are often competitive and are not vulnerable to market wholesale price changes. This also means it’s easier to forecast or predict your next energy bill because the unit price will not change for the contract period.
Variable-rate tariff
On a variable rate energy tariff, the price can go up and down if the wholesale cost of energy increases or decreases.
With a variable tariff, the supplier can change the unit cost at any time. However, they must notify you beforehand so you have the option to switch to a fixed price tariff if that would suit your needs better.
There are no contracts with a variable tariff. So, you are free to leave at any time without paying an exit fee.
You may benefit if the wholesale price of gas and electricity falls, but on the flip side, you could pay more if the prices go up.
Both types of tariffs have their ups and downs. Your energy unit price is secure with a fixed tariff, making your bills easier to budget. However, if you want to switch suppliers early, you may have to pay an exit fee if the fixed term has not yet ended.
Is it cheaper to have a fixed tariff?
Sometimes! The current fixed rate deal prices are dependant on the current status of the energy market wholesale prices. This means when wholesale prices are high across the market, switching to a fixed-rate deal is likely to be more expensive. However, in most cases, when the market conditions are favourable and stable, you are likely to get a great fixed-rate deal if you shop around.
Generally, fixed-rate deals are usually competitively priced and the best way to lock in your unit price for a year or two. You’ll have the peace of mind of knowing precisely where you are with a fixed rate tariff. The price will not go up or down over the term of your contract. With a fixed rate tariff, you are not vulnerable to any market fluctuations.
The main benefits of a fixed-rate tariff:
- Sometimes cheaper than the variable rate alternative
- Protection from any price hikes. Giving you peace of mind for the length of your contract
- Control of your energy bill. You’ll know how much you are paying a month to avoid any nasty surprises
The disadvantages of a fixed-rate tariff:
- The downside of being on a fixed rate tariff is you won’t benefit if the wholesale energy prices drop However, currently, prices are rising so this is unlikely in the current climate!
- There is likely to be an early exit fee if you change your mind
- You need to be aware of when your deal ends to avoid being switched to the supplier’s standard variable tariff
How long can I fix my energy tariff?
It varies. The standard fixed-rate contract length across the market appears to be 1-2 years. Although there are deals out there for longer periods. In addition, some suppliers offer deals for some unusual lengths of time, such as 9, 14 and 20 months.
A smart move may be to fix your energy price for just 12 months. By choosing a longer contract, you could end up paying a premium for fixing your price for 2-3 years. But as this involves predicting the future, it is difficult to say definitively!
The market is undoubtedly competitive enough that if you came out of a deal at the end of 12 months, you would still have a vast selection of other money-saving tariffs to switch to next. If you fix your tariff for 2-3 years, you will most likely have to pay a higher exit fee if you choose to leave early and that could be as much as £100 per fuel.
Is now a good time to switch to a fixed deal?
If you’ve been with the same supplier for a long time, the answer is almost certainly yes. This is because you are likely to be on one of their least competitive tariffs after your previous deal ended. So, it’s good practice to search the market every 12-24 months or consider signing up for an auto-switching service, so you don’t end up paying over the odds on a standard variable tariff.
Even if you are already a savvy energy switcher, now is an excellent time to consider changing energy suppliers as wholesale prices are predicted to rise shortly. This is a result of the cost price of fossil fuels rising at an unprecedented rate. So, getting in there now and locking down a deal will mean you will protect yourself from any trouble ahead.
In addition, the current energy price cap is likely to rise by £100 per household from October too as suppliers start to pass on the rising costs. All these factors make now the perfect time to consider switching energy suppliers to keep your bills under control.
How to find the best-fixed energy tariff?
By far the most popular and efficient way to find the best energy deals currently available is to use a comparison website. An unbiased option is Martin Lewis’ Cheap Energy Club. Comparison websites allow you to see all the available energy deals available to your postcode in just a couple of minutes.
Over half of energy switchers in the UK use a comparison service. It is recommended to check out 2-3 comparison websites as some suppliers will offer exclusive deals through one but not others. In addition, there will always be deals that can only be found by going directly to the energy supplier as well. So it may be worth doing a little extra research if you have time.
You can also sign up for alerts of new deals with most of the comparison websites. Doing this will mean you receive a notification if they detect that you might qualify for a better deal. Most comparison services will also contact you when it’s time to consider switching again.
In addition to going direct and using comparison websites, there are also auto-switching services. Only used by a small percentage of consumers, these auto-switching services will automatically switch you to the best deal available to you when it’s time to change suppliers again. This is very convenient for those that might forget otherwise and will ensure you won’t end up on an expensive, standard tariff.
If you are considering switching suppliers, a fixed-rate energy tariff is a great way to freeze your energy pricing to avoid being affected by the predicted price increases later this year.
The content contained in this article is provided for informational purposes only and should not be construed as advice on any matter. You should not rely on the information published in this article.
