Newspapers seem to be forever warning of yet another hike in utility prices, but is it a good idea to fix your energy tariff or will you just end up paying more in the long run?
Essentially when you fix your energy tariff you are buying stability and betting on prices going up. This means there‘s the potential to make significant savings on your energy bills if prices continue skyward but there's also a risk that you could end up paying over the odds if prices drop.
Here’s what you need to know before you tie in to a fixed rate energy deal:
What is a fixed energy tariff?
A fixed energy tariff is one that provides some sort of guarantee about the price per unit you'll pay for your gas or electricity until a certain date in the future - this can be anything from a few months to nearly five years.
If you pick the right tariff you'll not only get protection against energy price rises, but you should also be able to cut your energy bills by a significant amount – in the short term at least.
Things aren’t that straight forward though; there are several different types of fixed energy tariffs - fully fixed, capped or fixed discount - and each has different benefits and restrictions. You’ll need to know the difference between them so you can be sure you sign up to the energy tariff that's really right for you.
Fully fixed energy tariffs
A fully fixed energy tariff is one where you agree to pay a certain price per unit for your gas or electricity for the duration of the deal. This means you’re protected against price rises but also that you’ll miss out if prices fall. Also, assuming the amount of energy you use does not vary significantly your energy bills should remain roughly the same throughout the term.
Capped energy tariffs
A capped energy tariff sets a maximum price per you unit for your gas or electricity above which the price will not rise during the term. However, if the wholesale cost of energy drops beneath this, your price per unit will too. This means you can budget knowing that your bill won’t shoot up at short notice but you also get to benefit from price falls.
However, as you are effectively getting the best of both worlds when you opt for a capped energy tariff the maximum price per unit is likely to be slightly higher than that available if you fully fix the price of your energy.
It’s worth noting that many suppliers use the terms fixed and capped interchangeably. For example some providers advertise flexible ‘fixed’ deals that act like a capped tariff if prices drop. Whatever the name of the tariff, you should know exactly what type of policy you are signing up for before moving.
Fixed discount energy tariffs
A fixed discount energy tariff is in a way not a truely fixed tariff as the price of your energy will still fluctuate. Instead, this type of deal usually offers a percentage discount on the price per unit charged by the provider’s standard energy tariff for a fixed period of time. This means that the cost of your gas and electricity will rise and fall throughout the term, but at a discounted rate.
The benefit of fixed discount energy tariffs is that they can often provide the best initial saving on your energy bills, however if prices rise then so will the cost of your energy.
Which is better?
There's no straight forward answer to this as it's completely dependent on:
- your energy usage
- what energy prices are doing
- the deals on offer
You'll need to look at the savings on offer now and decide whether you'd be happier fixing or capping the price of your energy and forgetting about it for the duration of the deal, or opting for a discounted tariff and seeing the cost of your energy fluctuate.
So is it really worth fixing my energy prices?
If you are on a standard energy tariff then looking at switching to a different deal is a must as it’s very likely you’re paying too much for your energy.
After all, when you tie in to some kind of fixed energy tariff you're getting:
Protection from price rises
If you tie in to some kind of fixed energy tariff you're protecting yourself against future price increases. With energy markets known for sharp price rises fixing your payments to protect yourself from future jumps can be a smart thing to do.
Stability
By choosing a fully fixed or capped tariff you are setting the maximum cost of your energy for the duration of the agreement. Assuming your usage remains roughly the same your monthly payments shouldn't rise significantly at any point. This is especially the case if you pay by direct debit where the payments are set and taken automatically. This makes it easier to budget every month as you know exactly how much you’ll need to pay for energy.
Cheaper energy
All fixed deals offer some kind of discount on the supplier's standard energy price so it makes sense to take advantage of them in one way or another. The most important thing to do is find out exactly how much energy you use and when. Knowing your energy habits are will allow you to choose a tariff that is best suited to your individual needs - whether that be a fully fixed, capped or discounted deal.
However, things aren't quite that straight forward as there are some issues that you need to know about before you commit to a fixed term energy deal.
Lack of flexibility
A major drawback of fully fixed deals is that if prices do drop in the future you could find yourself paying over the odds for your energy. Opting for a capped or discounted deal would help to mitigate this risk although the savings if prices stay high may be substantially less. So you’ll need to weigh up the potential savings of tying into a fully fixed tariff compared to the other fixed alternatives and see whether the difference is big enough to be worth committing for.
Exit fees
If after taking out a fixed term energy deal you decide you want to switch to a cheaper tariff then there is a good chance you will be hit with an exit fee. These can range anywhere from £10 up to a whopping £200 if you are in a long term deal. This means that if prices do fall during the fixed term you could find yourself paying more than should - and moving onto a cheaper deal could be quite costly.
However, all is not lost; if you find yourself stuck paying too-high energy prices simply work out whether the potential savings you can make be switching to a different outweigh the penalty - if so then it could still be worth moving provider.
Often staying on the same tariff for a long time can mean you end up paying more so consider all your options, work out when the best time is for you to switch and shop around for the energy tariff that gives you the biggest savings on your energy bill now and in the future. Of course, cutting your energy usage is a must for cheaper bills too.
