Since 2014 OFGEM, the energy sector regulator, has been working hard to simplify gas and electricity bills. Complex charging structures are now banned and energy companies must let consumers know which of their tariffs are cheapest for them. This is to give consumers a better chance of understanding their bills.
When searching for a new energy deal, you will usually see one of two tariffs- Fixed or variable. Both have advantages and disadvantages and both can offer the best packages for you. It will all come down to your individual circumstances and the energy market at the time.
What is a Fixed Energy Tariff?
A Fixed Energy Tariff refers to the price you will be agreeing to pay per unit of energy (whether that be gas, electricity or both). These tariffs are usually offered over a fixed contract term such as 12 or 24 months. Over this time the cost of your energy will not change. If wholesale energy costs rise you have protection from increased costs. However, if wholesale energy prices fall, you will miss out on potential savings passed on by your supplier.
To get a fixed deal you will need to agree to a set contract length, typically 12 or 24 months. During this time, you will usually need to pay a fee if you want to break from the contract before the term ends.
What is a Variable Energy Tariff?
The keyword from this type of deal is ‘Variable’. When wholesale energy costs rise and fall, your bill will reflect the market. If your energy supplier needs to pay more, charges will increase. If the wholesale market costs drop, then the savings your supplier has made means a drop in charges. A minimum contract length will not usually apply. This means that you will be free to change suppliers without being charged an exit fee.
What are the main differences?
Minimum terms and the cost of a unit of power are the main differences between the two. With a fixed deal, you are in a minimum term contract and will incur charges if you want to leave the deal early. With a variable deal, your contract with your energy supplier is on a rolling basis. This means that should you find a better deal; you will be free to ‘jump ship’ without the need to pay an exit fee.
The price you pay per unit of energy is the next main difference. This is the measure of electricity or gas that you consume and is usually shown in KWh (Kilowatt hours). This information comes from your meter readings and is the number used to calculate your bills. On a fixed deal, you get a fixed price per gas and electric KWh. This is usually alongside a daily rate but the KWh is what will make up the majority of your bill. That price will not change throughout your contract. It doesn’t matter if your energy supplier suddenly needs to pay more, you have protection from any sudden spikes in wholesale pricing.
On a variable tariff, you will still pay a daily rate but the amount you pay for a KWh can change. This will be a reflection of the wholesale market but it means that you can benefit from drops in the wholesale price. Of course, both can work the other way around. You will not get any reduction on your fixed deal and a variable deal can see rises as well as drops in pricing.
Which one should you choose?
Hopefully after reading the differences between the two, the right choice for you is clearer. There are some points to note, which may help you to decide:
Fixed Energy Tariffs are usually the cheapest. Because you are committing to a minimum term energy companies can offer customers on a fixed term the best deals. However, ‘the best deal’ is only a reflection of the market at any given time. Today’s best price may not look as good in a few months. On a fixed deal you have protection from any rises in the market.
You will be able to budget better on a Fixed Tariff. Your bills will change month to month, depending how much energy you are using. Knowing how much you will be paying per unit each month can help with budgeting. You should be able to get an idea of what you will be using in colder months versus warmer months and anticipate your bills accordingly.
If you think the wholesale price may drop significantly then a variable deal could work out best for you. The price per KWh today may end up being significantly higher than what it might be in 6 months. In this instance a variable deal will work out to have been the best choice.
If personal circumstances mean that you cannot commit to a 12-month minimum term then consider a variable deal. Any savings you get from a fixed deal could be instantly undone by exit fees.