Fixed vs. Variable Tariffs: What’s Best in an Energy Crisis?

What Are Fixed and Variable Energy Tariffs?

A fixed tariff gives you a set price for each unit of energy, like electricity or gas, for a set period. This period usually lasts between 12 and 24 months. No matter how wholesale prices change, your energy rate will remain the same during the plan. Many people like fixed tariffs because they provide peace of mind. You will know exactly how much you pay for each unit of energy. This can help you budget better.

A variable tariff changes with the wholesale market. The cost you pay for each unit of energy can rise or fall based on energy prices. In 2023, 85% of UK homes had variable tariffs. These tariffs usually follow the Ofgem energy price cap. This cap helps keep consumers safe from big price increases.

Key Differences

• Fixed Tariff: Your energy price stays the same for a certain time, like 12 or 24 months. This helps keep you safe from price increases.
• Variable Tariff: Your energy rate can change based on the energy market. This means you could save money if prices go down, but you might also pay more if prices go up.

Key facts

• In 2023, 85% of UK homes had a variable rate tariff.
• Energy prices rose by 54% in April 2022 due to an energy crisis. This greatly affected the average bill for many people.
• The energy price cap went up by 54% in April 2022 and then by another 27% in October 2022. This change affected the daily standing charge for many households.
• Fixed-rate tariffs keep customers safe from price increases for up to 24 months. This is good for people wanting stability.
• During the 2022 energy crisis, some fixed-rate tariffs were up to 30% more than the price cap. So, they were not always the cheapest option.
• Ofgem's price cap helped 22 million households in 2023. It limited the highest unit cost for gas and electricity under a variable rate tariff.
• Switching to a new energy supplier saved UK households around £290 in 2022. This was true for those searching for better energy supply deals.
• In 2022, 27% fewer households changed energy suppliers than in 2021. This happened because there were fewer fixed energy deals available.
• A total of 5.8 million households switched energy suppliers in 2022, down from 7.7 million in 2021. Many people chose short-term fixed contracts due to market uncertainty.
• As of April 2022, the average standard variable tariff for UK households was £1,971 a year. This included the daily standing charge.
• By October 2023, the average annual energy bill for a typical UK household was £2,500. This amount included the standing charge and the energy used.
• Some energy suppliers stopped offering fixed-rate tariffs during the crisis. This left new customers with fewer choices for long-term protection.
• The price cap rises also affected prepayment meters. This raised costs for vulnerable customers.
• The Winter Fuel Payment helped lower some costs for vulnerable customers who had high energy bills during the crisis.

Benefits of Fixed Energy Tariffs During a Crisis

Choosing a fixed energy tariff can really help during an energy crisis. A major benefit is that your price stays the same for the entire contract. This means it will not increase even if energy prices go up. This is important because energy price caps are rising. For instance, UK energy prices increased by 54% in April 2022 due to the energy crisis. After that, the price cap rose again by 27% in October 2022.

Fixed tariffs protect you from changes in the energy market. When you fix a rate, you don’t have to stress about sudden rises in wholesale energy prices. This means you won’t pay more even if the price of energy increases. A fixed tariff is often a good choice if you want stability and certainty.

This chart will show how prices of fixed and variable tariffs change over 12 to 24 months. You will see that fixed tariffs remain the same. In contrast, variable tariffs fluctuate based on wholesale energy prices.

Drawbacks of Fixed Tariffs

Fixed-rate tariffs can help people avoid high prices. But, they also have some problems. If wholesale prices drop, families with fixed tariffs miss out on those savings. This may result in them paying more than those with variable tariffs. During the 2022 energy crisis, some fixed tariffs were as much as 30% higher than the energy price cap. This meant customers had to pay rates that were more than what others paid with variable tariffs.

One more issue is the exit fee. A lot of fixed contracts charge an early exit fee. This fee happens if you leave your contract before the end. It can cost between £30 and £60 for each fuel type, like gas or electricity. If you want to switch to save money with lower prices, this could end up being costly for you.

Benefits of Variable Tariffs During a Crisis

A variable tariff offers more choices for homes and can help save money when wholesale prices drop. The energy price cap from Ofgem controls the charges for a standard variable tariff. This gives people on variable tariffs some protection from high prices.

In April 2022, the average standard variable tariff for a typical UK household was £1,971 per year. By October 2023, it went up to £2,500 a year because of the Energy Price Guarantee. If wholesale prices drop, those on variable tariffs may notice their energy bills go down. Variable tariffs let you enjoy lower energy prices, which fixed tariffs do not provide.

Drawbacks of Variable Tariffs

Variable tariffs are adjustable, but they can result in higher costs. When the energy market is unpredictable, families with variable tariffs may see their bills rise significantly. This price uncertainty can make budgeting difficult. This problem is especially true during an energy crisis when prices can change rapidly.

In April 2022, the energy price cap rose by 54%. This rise led to many homes receiving much higher bills. Those on variable tariffs noticed the change right away. However, households with fixed tariffs did not feel the impact immediately. So, in an unstable market, variable tariffs can cause sudden spikes in energy costs.

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Which Tariff to Choose in an Energy Crisis?

When deciding on a fixed tariff or a variable tariff during an energy crisis, consider what your home needs and your budget. A fixed tariff may be the better choice if you want steady prices and don't want sudden price increases. A fixed-rate tariff can safeguard you from rising prices for up to 24 months. This way, you can feel confident that your energy bills will not suddenly rise.

A variable tariff could be a good choice if you want to benefit from lower prices. However, it also has risks since prices can increase. It’s important to weigh the pros and cons of each type of tariff. Think about your energy supplier, the details of your contract, and how often prices might change soon.

How Time-of-Use Tariffs Fit Into the Equation

A different choice to fixed or variable rates is the time-of-use tariff. This option has different prices based on the time of day. Families with a smart meter can take advantage of this tariff. They can use energy during cheaper times when demand is low. This option is very useful during an energy crisis when prices are high during peak times.

Households that use time-of-use tariffs can save money by changing the times they use energy. For example, doing laundry or using dishwashers during off-peak hours can lower bills. This is very helpful for people with a dual fuel plan.

Energy Price Caps and Their Impact on Tariffs

The Ofgem energy price cap puts a limit on how much energy suppliers can charge for each unit of energy. This cap mainly affects variable tariffs. It changes twice a year based on the wholesale market. For example, in April 2022, the price cap went up by 54%. This large increase raised bills for many households with variable tariffs.

The price cap helps ensure families do not pay too much when the market is unstable. But it does not apply to fixed tariffs. This means people on fixed-rate plans might pay more than those with capped variable tariffs. This is especially true for those who picked a high fixed price before the cap changed.

This chart shows how the energy price cap changed from April 2022 to October 2023. It looks at how this affects customers with variable tariffs. It also compares the average bills for households that use variable tariffs based on the energy price cap.

FAQs About Fixed vs. Variable Tariffs During an Energy Crisis