Energy price cap: How do fixed and variable energy tariffs work?
Last week Ofgem announced an increase of the new price cap by £693 a year on energy bills for the average household paying by Direct Debit. Many are asking the question of what to do about these rising energy prices?
We understand it can be an overwhelming time with all the information and advice you are getting, especially the advice on whether or not you should switch your tariff.
This is why our Energy Specialists have broken down the difference between a fixed and a variable tariff to help direct you to what is best for you and your home.
How is energy use charged and billed?
First off we would like to provide more details on how energy is billed, by doing this let’s talk about how the energy use is charged.
The amount of electricity or gas you use is measured in “kilowatt hours”, which is usually shortened to kWh. This is what your meter measures.
This is often referred to as a “unit” of energy when talking about household energy bills. Energy suppliers state prices as pence per kilowatt-hour (p/kWh). This is the cost per unit or unit rate.
Units of gas will be charged at a different rate to units of electricity, with both applying a daily standing charge. The average kWh per day in a UK household is between 8.5 to 10 kWh. However, many elements can influence your average energy consumption and how much you pay for your electricity – including the equipment that you use.
Ofgem’s average price cap unit rates applied to a customer paying by Direct Debit: (1)
Fixed and variable explained.
Fixed rate tariff - This means the prices are fixed for the term of your tariff – so unit rates and standing charges will stay the same until your tariff ends. The amount you pay will depend on how much energy you use.
If you agree to a fixed tariff (usually this is 1 or 2 years) we can pre-buy (reserve) your energy further ahead and keep your rate the same during the tariff, even if the costs to buy energy then go up.
Standard variable (flexible) tariff - Here at E.ON Next, the standard variable tariff is referred to as a Next Flex tariff. This tariff has variable prices which means that the amount you pay for your energy (i.e. your unit rates and standing charge) can go up and down depending on wholesale energy prices. The maximum level of this is changed twice a year and is called the price cap.
Each of these tariffs come with pros and cons, we have listed these below:
Fixed tariff pros:
You don't need to worry about any price increases. You don't need to worry about your energy rates increasing, as your bill will only be affected by usage.
Budgeting is easier as you'll have a clearer idea of how much you pay for your unit rates.
Fixed tariff cons:
The unit prices are fixed for the duration of the contract. Prices won't go down even if the wholesale prices come down.
Variable (flexible) tariff pros:
Energy prices can go up as well as down with wholesale costs. So there will always be the chance of the prices to come down or up.
Flexible tariffs are easier to leave.
Variable (flexible) tariff cons:
This could be more expensive than fixed rate tariffs depending on how much the price cap review increases.
So which tariff should I choose?
This mainly depends on how you feel about your monthly energy bill changing. A fixed tariff means if you use the same amount of energy each month, your bill will be the same each month. A variable tariff could mean your bill could change even though you haven't changed the amount of energy you use.
If you're currently on a flexible tariff with us or up for renewal of a fixed tariff shortly, we'll be in touch by email or letter in the coming weeks with guidance for what to do following Ofgem’s price cap announcement, and where to find support if you need it.
Every household is different and we recommend reading the latest guidance from Ofgem (2), the government and reputable money-saving resources to help you make an informed decision. Don’t forget that you can view and change your tariffs at any time in your online account, there’s no need to call in.
If you would like more information on what’s going on in the energy industry and the background of the price cap, take a look at our in-depth blog about it
If you are currently struggling with payments or in need of support please know to reach out as soon as possible our team is on hand to help. More information is available on our website.
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