Fixed energy tariffs explained

Thursday 25th July, 2013 By Martin Fagan
Fixed energy tariffs explained

If you want to protect yourself against the rising energy bills, then a fixed rate energy tariff might just provide the peace of mind you’re looking for.

Energy prices seem to be in a constant state of flux at the moment. One month the "big six" energy suppliers - British Gas, EDF Energy, E.ON, Npower, SSE and Scottish Power - all ratchet their prices up only to lower them a few months later.

However, the prices always go up by more than they come down, which caused the then transport secretary Justine Greening to quip in May 2012 that energy prices "shoot up like a rocket and fall like a feather".

And energy bills DO go up. According to banking giant Santander, in ten years (2001-2011) the price of gas increased 181%, electricity increased by 109%, water bills have risen by 64% and council tax is up by 57%. By comparison, salaries have increased by just 24%, from £16,964 in 2001 to £21,093 in 2011.

So being able to fix the price you pay for your energy for a set period of time makes sense, as it protects you from any new price rises and also helps plan your budget.

What is a fixed energy tariff?

Fixed energy tariffs work by guaranteeing that the price you pay per unit of gas or electricity will stay the same for a set amount of time. This is usually for 12 or 24 months.

You may choose to sign-up to a fixed-price energy tariff to help you budget every month, or so you can avoid potential price hikes - with prices at a fixed rate, if the energy suppliers' standard prices increase, your bills will remain the same.

However, if prices fall, you could end up paying more for your energy than other customers on the supplier's standard tariff. Customers will also usually have to pay a premium for the guarantee of fixed prices, which means rates are normally fractionally more expensive than standard prices.

Moreover, fixed energy tariffs can be up to 20% more expensive than non-fixed tariffs, and because you're locked into a particular price, you won't benefit from any price cuts your energy supplier makes during the fixed period. Also look out for exit fees for leaving the deal before the fixed period expires.

Capped tariffs are similar to fixed price tariffs, in that you pay a premium for a guarantee that your rates won't increase above a set level for a set period. However, capped tariffs usually promise to pass on any rate reductions that the supplier makes to its standard rates. So your bills won't rise, and they could fall.

How long does the fixed period last?

Just a few years ago, the period for a fixed-rate tariff was up to three years, but subsequent high rises in the wholesale price of gas and electricity mean bills have increased dramatically and customers who fixed for a long period did so at the expense of their energy supplier's profits.

So energy suppliers have shortened the duration of fixed-price tariffs and now the best on the market is 16 months. When launching a fixed-price tariff, as the day the deal ends is well publicised, it makes sense to sign-up for it was soon as possible to get the longest period you can. For example if in this month you spot a deal ending on Sunday 30 September, 2013, the longer you leave signing up for it, the shorter the fixed period.

Know when your fixed period ends

If you're on a fixed or capped tariff, it's important to know exactly when the deal runs out, as you'll be moved to your supplier's standard tariff, so you need to prepare for the possibility of a sudden price jump when it expires, especially if energy prices have risen sharply in the interim.

It's possible to choose a new tariff and arrange for your new supplier to transfer you over on the day your current fixed or capped tariff ends, avoiding any higher charges from your current supplier moving you to a more expensive deal and also avoiding any cancellation penalties.

Beware the fixed-price tariff trap

If you're on a fixed or capped tariff that's due to end soon, or even if you're on one that's not ending for a while, there are several things you should be aware of:

Beware early cancellation charges - Early cancellation charges are like exit penalties, and apply if you switch from your fixed or capped deal to another tariff before the fixed period ends. They are normally between £20 and £40 per fuel. If you are unsure if your tariff has early cancellation charges, ask your energy supplier.

Know the end date - It's important you know exactly when your fixed period is due to end, so you can anticipate your switch and avoid having to pay more for your gas and electricity on your supplier's standard tariff, or get locked into another deal.

Know the name of your tariff - All major energy suppliers offer fixed and capped tariffs with very similar names, so it's important you know exactly which one you're on when you come to compare prices. Check your bill for the exact name of your tariff and the date it ends, as energy suppliers tend to offer lots of different fixed tariffs with very similar names.

Know which tariff you'll be switched to - If you don't tell your supplier that you plan to switch to another deal after your fixed period has ended, most suppliers will automatically put you onto their standard deal. Standard tariffs are usually a lot more expensive than other tariffs on the market, such as online energy tariffs and discounted energy deals.

However, it is worth checking with your supplier which energy plan you'll be put on, as some suppliers switch their customers whose fixed deals have ended straight on to another fixed deal, which may not necessarily be the cheapest deal for you. You may also incur early cancellation charges if you wish to switch to a better deal.