Energy Tariffs: To Fix or Not to Fix?
To fix or not to fix? That is the question for consumers across the UK pondering whether to fix their tariff. If you’ve been offered a fixed price energy contract by your provider, you shouldn’t rush into accepting it even if the numbers look appealing. In this guide, we explain the factors you should consider in order to make an informed decision.
What’s the Current Situation with Energy Prices?
Over the past couple of years, escalating energy prices have been driven by various factors, including increased demand, restricted supplies, storage limitations and the continuing conflict in Ukraine.
Addressing concerns about an anticipated 80% surge in energy prices, the UK Government unveiled the Energy Price Guarantee (EPG) in October 2022. Expected to remain in effect until the latter half of 2024, the scheme aims to mitigate the impact on consumers by enforcing price limits.
Under the EPG, the restriction applies to energy units rather than yearly expenses. Consequently, households with higher energy consumption will still incur greater costs compared to those utilising less energy.
The Office of Gas and Electricity Markets (OFGEM) functions as the regulatory body overseeing energy providers in the UK. OFGEM enforces a 'price cap' of its own on domestic suppliers, placing an upper limit on the charges they can impose on consumers for each unit of energy, measured in kilowatt hours (kWh).
While the Government formulates its Energy Price Guarantee (EPG) using unit rates, OFGEM determines its price cap with reference to the daily standing charges.
After hitting a peak last summer, wholesale gas and electricity prices have been falling consistently for several months. A relatively mild winter, along with climate and money conscious consumers reducing their consumption, led to a decline in demand. This enabled the energy supply to catch up.
From 1st July 2023, the average household’s annual energy bill dropped by 17% for consumers on standard tariffs, which is the majority. Since wholesale energy prices began to fall, most of the big providers have introduced new fixed rate packages. These deals are primarily sent to existing customers, although a few introductory offers have also emerged.
This has left many customers unsure of the best option and weighing up whether to accept a new deal. To make this decision easier for consumers, Ofgem asked energy providers to cut the scratch the small print and lay out the details of each tariff clearly.
According to Which?, some of these new offers come in at around £100 below the current Ofgem price cap and include discounts for buying both gas and electricity, often called a ‘dual fuel’ tariff. Although, Which? Also reported that most of these offers came with hefty exit fees attached.
How Will Energy Prices Change?
Market researcher Cornwall Insight has estimated a decrease of £148 in annual bills from October 2023 as a result of an upcoming price cap review by Ofgem. It's important to note that energy bills remain substantially higher since Russia's invasion of Ukraine in early 2022.
Senior Consultant Kate Mulvaney said: “While wholesale energy prices have been falling, the drop in bills from October will probably be a little less than consumers were hoping for. Unfortunately, our forecasting to the end of this decade is that prices are going to stay higher than people were used to before the energy price crisis."
Market experts have also predicted a slight price cap increase in January 2024.
You shouldn’t expect any further support from the Government unless you benefit from cost-of-living payments made to people on lower incomes. £400 energy discounts were available to every household, which were paid in six instalments between October 2022 and March 2023, but have since been phased out.
Should I Fix my Energy Deal?
If your energy provider has presented you with a fixed rate plan, your first step should be to examine the precise unit rates on offer and compare these against what you’re currently being charged. For the majority of customers, the rates you’re subject to will typically be a variable (sometimes called standard) tariff.
If the fixed unit rates are close to those you currently have, opting for the fixed deal will guarantee price consistency for the next 12 months but the savings could be almost insignificant.
In the case that fixed unit rates surpass your existing rates, you will unfortunately incur losses. Equally, if the fixed unit rates are well below your current rates, it could be a favourable proposition.
Ultimately, your decision may come down to how much you value price stability.
How Can I Save Money on Energy Bills?
With so much concern over the volatility of energy costs and confusion over varying contracts, consumers are looking for ways to save money on their bills more than ever. At UKPower, we can help you compare gas and electricity suppliers to find the cheapest energy prices, switch to a better deal and cut the cost of your energy bills.
Click here to run an energy price comparison, and see if you could be paying less for your gas and electricity.