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3. Fixed vs variable energy

There are hundreds of energy tariffs on the market – but picking the right one doesn’t have to be mind-boggling. Energy suppliers may give their tariffs fancy names but they usually fall into two main categories: fixed or variable.

You need to understand how energy is billed and the differences between fixed rate and variable rate energy tariffs before deciding which type of tariff is best for you. In short, fixed tariffs offer certainty about unit prices while variable rates are more of a gamble.

Unit rates explained

To understand how fixed and variable rate energy tariffs work, you need to understand how energy use is charged. Energy use is measured in kilowatt hours, which is usually shortened to kWh. This is the equivalent of one kilowatt of power being expended for one hour. It’s 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. Most suppliers also levy a daily standing charge for electricity and gas, and charge different rates depending on the region you live in.

What is a fixed tariff?

A fixed energy tariff means your unit rates stay the same for the duration of the plan. This will usually be for one year, 18 months, two years or three years.

It’s important to understand this doesn’t mean your bill will be the same each month: it’s the unit price that is fixed, not the total amount you pay. How much you pay is calculated by multiplying the unit rates for gas and electricity by the amount of energy you use. The more energy you use, the bigger your bill will be.

What is a variable tariff?

A variable energy tariff means your provider can change the unit rates for gas and electricity during the duration of your plan. It might do this if the cost of wholesale energy rises or falls. However, there won’t necessarily be a correlation between the wholesale cost of energy and the unit rate you pay – providers can change prices on a variable tariff whenever they like.

This means your bill can rise from month to month even though you use exactly the same amount of energy. However, your supplier should notify you if it does intend to raise prices.

Pros and cons of fixed energy tariffs

Pros

If you’re on a fixed tariff and wholesale energy prices increase, or your supplier announces a price rise, your unit rates won’t change. This means fixed energy tariffs make it much easier to budget since, assuming you use the same amount of energy each month, your bills won’t increase for the duration of the fixed rate. It’s a bit like having a fixed rate mortgage – you’re protected from changes in the Bank of England base rate which affect variable rate mortgages.

Fixed rate tariffs can be good value and cheaper than variable rate tariffs (although not always, so do your research). Year-long fixed deals can often be cheaper than variable rates but you might pay a premium for the security of fixing for two years or longer.

Almost all suppliers offer fixed energy tariffs so there’s lots of choice. Fixed lengths are normally for 12, 18, 24 or 36 months. Suppliers must remind customers a fixed deal is coming to an end 42 to 49 days before the contract expires. You can switch in this notice period without paying an exit fee.

Cons

If wholesale energy prices fall and your supplier announces a price drop, you won’t benefit if you’re on a fixed rate tariff. This is because the unit rate you pay will stay the same.

Exit fees are almost always applicable if you want to terminate your fixed energy tariff before the contract end date. These are normally in the region of £25 to £30 per fuel, so it would cost you £50 to £60 if you are on a dual fuel tariff.

You’ll need to take action at the end of a fixed term tariff. If you do nothing, chances are your energy supplier will automatically switch you to its standard variable tariff, which tends to be an expensive option.

Pros and cons of variable energy tariffs

Pros

Energy suppliers usually reduce their prices if the cost of wholesale energy falls. If you’re on a variable rate tariff and your supplier reduces its prices, the unit rate you pay for energy and gas will fall. Assuming you use the same amount of energy each month, this will mean cheaper bills.

Variable tariffs tend not to have exit fees. This means you can switch to another supplier or tariff at any time, without paying a penalty. Variable energy tariffs don’t have end dates. You can stay on the same tariff for as long as you like.

Cons

On the downside, variable deals often start off with a low price, but there is no guarantee how long it will stay that way. If prices rise, so does the unit rate you pay and therefore your energy bill will go up too.

You need to really keep on top of things if you opt for a variable rate tariff. This means keeping an eye on the energy market and switching to a better deal if your supplier ups its prices.

What is the Ofgem price cap?

Ofgem (the government Office of Gas and Electricity Markets) introduced its energy price cap on 1st January 2019. The price cap was brought into force to protect around 11 million energy customers from being charged excessively high amounts for their energy supply. The cap is adjusted twice a year – in April and October – to allow for fluctuations in the cost of supplying energy due to seasonal differences.

The Ofgem price cap is only applicable on default and variable rate tariffs, and only applies to the cost per unit, not to your total bill. If you choose to sign up to a fixed-term tariff, there is no need for the Ofgem price cap because the unit cost is fixed for the duration of your contract anyway.

What is a standard variable rate tariff?

The majority of energy suppliers will have a standard variable rate (SVR) tariff. This is the supplier’s basic plan and is sometimes called just a variable or default tariff.

It is usually the default option for certain customers. For example, if you move house and inherit the supplier of the previous tenant, it will usually put you on the standard variable tariff. If you’re on a fixed tariff and it ends, you’ll normally be transferred to the standard variable rate if you don’t request a new fixed tariff or switch to another supplier. If you’ve never switched supplier, you’re probably on your supplier’s standard variable rate.

The standard variable rate tariff tends to be the most expensive tariff a supplier offers. If your supplier hikes prices, the price of your unit rate will go up.

If you’re on your supplier’s standard variable rate tariff, you’ll be better off switching to a different tariff or new supplier. Not all variable tariffs are 'standard' though – other variable rate tariffs could be priced competitively.

Which is best for you, fixed or variable?

When choosing an energy tariff, it’s easy to be attracted to cheap, variable tariff options. But you need to remember that while a variable tariff rate may be the cheapest at the outset, it might not be in the future. You’ll need to pay attention to any price hikes from your supplier and, if these are likely to cause your bills to rise significantly, shop around for a new tariff.

If you’re on your supplier’s standard variable rate tariff (SVR), you should definitely switch – you’re paying more for your energy than you need to.

Fixed tariffs give you a certain amount of peace of mind – they’re less of a gamble and you don’t have to worry about price rises. And in many cases they’re cheaper too. The main downside is exit fees and the possibility you’ll miss out on cheaper deals that become available later on.

Choosing between a fixed or variable energy deal is very similar to choosing between a variable or fixed mortgage deal, and both have their merits. The best type of tariff for you will depend on your personal circumstances, what you expect energy prices to do in the future, and your attitude to risk.

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