THE BIG MONEY QUESTION: Is it time to enter into a fixed energy contract?
In a new series, we answer YOUR burning questions about money…
All I’m hearing right now is that the energy price cap is going to go up another several hundred pounds in October.
I’m on a standard rate, but recently got offered a flat rate deal from my provider. I haven’t been tempted so far because it looks so expensive.
But am I wrong? Should I lock myself into a fixed energy tariff? HP, Birmingham
Feel the heat: Until recently, the idea of locking yourself into a fixed energy tariff much higher than the tariff you currently pay would have seemed absurd
Rachel Rickard Straus responds: Until recently, the idea of locking yourself into a fixed energy tariff much higher than the tariff you currently pay would have seemed absurd. But the energy market is in disarray and energy prices are expected to pick up again in the fall.
So even if fixed rate rates reach sky-high levels of up to £4,412, for some people who can get the best deals, it may still make sense to fix them.
Millions of households are already struggling with their energy bills, which average almost £2,000 a year. But there is more pain ahead, as prices are expected to rise further.
Last month the regulator, Ofgem, predicted that bills under the energy price cap could rise later this year to an average of £2,800 a year, a 42% increase on current levels .
But energy analyst Cornwall Insight warns that figure could be closer to £2,980, an increase of 51%. And the pain doesn’t end there. He expects bills to rise again early next year to £3,003, before falling slightly next spring.
All of these estimates are for variable rate tariffs, which most households currently use. If you have never changed your energy contract, if you were on a fixed tariff that ended or if you were with a supplier that went bankrupt, you are likely to be on your supplier’s variable tariff.
Estimates are for the average household – your actual bill will vary depending on how much energy you use and where in the country you are.
For most people, their provider’s standard variable rate is the best option. Indeed, Ofgem has implemented a price cap that limits the amount that suppliers can charge customers for these offers. The price cap changes every six months, although it may soon change to every three months.
There are no fixed rate offers cheaper than the current ceiling price. However, some are charging less than the expected price cap in the coming months.
In some cases, it might make sense to lock one of them. However, it is not a simple equation. You need to calculate what you would pay if you stayed on the variable rate tariff and compare it with what is offered to you for a year on a fixed rate tariff.
The amount you would pay on the variable rate would be the equivalent of just over three months on the current cap price, plus three months on the October cap price, plus three months on the January cap price, and a little less than three months on the April ceiling price.
You may want to add a little more as you will be using more energy when prices are at their highest in the winter months. As a rough estimate, this should all be about 40% more than what you’re currently paying.
This means that if you’re offered a fixed rate deal for next year that’s up to 40% more than what you’re paying now, it’s worth considering.
For example, British Gas is offering one-year fixed rate contracts for customers costing just over £2,700 a year, 37% above the current price cap.
Some people may be happy to pay a little more to be certain of what their energy will cost for the next year. If you’re one of them, it might be a good idea to lock in a flat rate, even if it’s higher.
Beware, however, of the exit fees that are due if you want to leave a fixed rate earlier. Historically, these were rarely over £60, but today some providers charge ten times more. The British Gas deal includes a £200 exit charge for dual-fuel customers.
Exit fees make it harder to switch if prices drop and better deals come up. The best fixed rate deals tend to be offered by providers to existing customers. Therefore, keep an eye out for them – they usually don’t hang around for very long.
EDF Energy offers two-year fixed rate deals costing £2,800 with a £300 exit charge, but customers who sign up through the MyAccount section of their website can also get a £130 bill credit by entering the code SVTJUN22OFFER.
Eon is offering existing customers a one-year solution for £2,800 per year, with no exit fees.
There are also a few flat rates available on the open market, but at the moment they are more expensive.
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.