Fixed or Variable Energy Tariffs – Which is Right for You? – Forbes UK Advisor

If you have not changed energy supplier for two or three years, or if you have never done so, you will be on a standard “default” variable rate tariff which will most likely be more expensive compared to most fixed rate fares available on the market.

But that doesn’t mean a variable rate should be completely ruled out when switching to a new provider – there are competitive variable rates. And some people just prefer not to be locked into a deal for a set period of time.

Here’s everything you need to know about the two types of fares and how to choose between them.

Fixed and standard variable rate (SVT) tariffs explained

There are two types of energy tariffs:

• Fixed rate This type of tariff requires you to pay a fixed price per unit of energy used for a contractual term – usually 12 or 24 months. This does not mean that your bill will be fixed. The more energy you use, the more you pay, as always. You can have fixed rate offers for gas and electricity.
• SVT or ‘default’ With this type of tariff, the supplier can change the unit price based on wholesale energy costs and other factors, which will directly impact your bill.

Cheapest Variable Rate Bi-Fuel Fares

Why is an SVT generally more expensive?

SVTs are generally priced at a higher rate than fixed rates. Energy companies use fixed rate agreements to compete.

Customers who do not switch will be on an SVT, either because that is the rate they inherited from a previous user, or because they were transferred to a “default” variable rate once their fix ended.

Why is the energy price cap important?

In an effort to minimize the negative impact of SVTs on consumers, the sector regulator, Ofgem, maintains an energy price cap – a limit on the maximum amount suppliers can charge customers per unit of energy on an SVT or a default tariff.

Based on wholesale energy costs, caps for SVTs and prepayment meter energy prices are updated every February and August before taking effect in April and October.

Energy providers can adjust their prices as close to the new cap as they want each time.

Despite the existence of the cap, SVT prices are still significantly higher than most fixed rate tariffs, which means that those who do not switch to a fixed rate agreement are likely paying more than necessary for their energy.

The cheapest fixed rate dual fuel fares

Fixed rates: advantages and disadvantages

Here are the advantages of flat rates:

• Cheaper rates Your rate is usually competitively priced.
• Set prices Your rate per kilowatt-hour (kWh) – this is the unit in which your energy consumption is measured for electricity and gas – will remain the same for the duration of your contract, so you will not have to worry about price increases.
• Easy to budget Fixed rates also mean you can organize your money more easily.

Here are the disadvantages:

• Potentially higher costs Fixed rates are only cheaper if wholesale prices do not fall below, which makes standard variable rates cheaper.
• Exit fees Unlike standard variable fares, you are obligated to hold your fares for a set period of time and may have to pay a fee for early exit.

What are the advantages and disadvantages of a standard variable tariff?

According to Ofgem, more than half of UK households (53%) benefit from their supplier’s default/standard variable tariff.

Here are the advantages of standard variable tariffs:

• Permanent contract You do not have to stick to the tariff for a specific period of time and are free to switch providers at any time.
• No exit fees If you decide to switch providers, you won’t have to pay exit fees.
• Potentially cheaper prices You might end up paying less than you would with a flat rate depending on the wholesale market.

And here are the cons:

• fluctuating prices Your rate may increase based on wholesale prices.
• Difficult to budget It’s hard to plan ahead without knowing how prices might change.

Should I set my energy prices?

Changing from a standard variable tariff to a fixed tariff should depend on your personal situation. Be sure to compare offers to find the best one for you. If you like to budget for the long term, a fixed rate will probably suit you better.

When can I leave my fixed price contract?

Check with your provider if you will have to pay an exit fee if you terminate your contract early. If your next transaction is much cheaper, it might be worth paying the exit fee.

Under Ofgem rules, you will not be charged for terminating your contract within the last seven weeks of the contract term.

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