How do energy tariffs work?

Last updated: 23 October 2020

In this guide you’ll find answers to question including:

What is an energy tariff?

An energy tariff details how your energy supplier will manage your account and how much you’ll pay. Contracts or plans you sign up for with an electricity or gas supplier have a tariff at their heart and are even sometimes referred to as energy tariffs. Although the distinction between energy tariffs used to be principally one of price – hence the name tariff – today they are also differentiated by how the energy is generated, the type of meter used and even the supplier’s ethical policies. This is why the terms tariff, contract and plan are often used interchangeably. The energy tariff you choose determines the way you are charged for your electricity and gas, whether it’s green energy that’s generated from renewable sources and the price. 

What energy tariff can I get?

There are two main types of energy tariff: fixed-rate and variable. A fixed-rate tariff sets out the price you will pay for electricity and gas for the duration of the contract, usually one year. A variable tariff charges you for the energy you use depending on the wholesale price of gas and electricity, which goes up and down. 

Fixed-rate energy tariffs

With this type of plan, you will know how much you will pay for your gas and electricity for the lifetime of your contract. They’re usually cheaper than standard variable tariffs, but you are locked into a contract and may have to pay an exit fee if you decide to switch early. Fixed-rate tariffs are useful if you need to keep a tight rein on your finances and will protect you if the price of wholesale gas and electricity shoots up. Of course, if the price falls, you could end up paying more. Over the last decade, fixed-rate tariffs have resulted in cheaper energy bills than variable tariffs.

Variable energy tariffs

The cost of energy on these plans fluctuates depending on the market price for electricity and gas. You can save money if the price goes down, but if an increase would leave you struggling to pay your debt it’s best to avoid this type of plan. Unlike fixed-rate tariffs, variable tariffs are often open-ended and you can leave when you choose without paying exit fees.

Fixed-rate vs. variable energy tariffs 

Whether you prefer fixed energy rates or variable ones depends on your attitude to risk. If you would rather play safe and know the gas and electric unit rates in advance, you should choose a fixed-rate tariff. If you think that the price of electricity and gas may be about to drop and you can afford to pay more if you’re wrong, a tariff with a variable energy rate may work for you. If your instincts are right and the wholesale price goes down, gas and electric unit rates will be cheaper and you’ll save money, but you should make sure that you have enough to cover your bills if prices rise. 

Standard variable energy tariff

All energy companies have a standard variable tariff. This is a special tariff that’s applied if you use energy without signing up for one of your supplier’s named plans. This could be because you have just moved into a new home and haven’t had a chance to find the best energy deal yet or because your previous contract has finished and you haven’t signed a new deal. The standard variable tariff is almost always more expensive than the supplier’s named plans, but because there are no exit fees, you can switch to a cheaper deal as soon as you find one. 

Other energy tariffs

There are a number of other types of plans, which may be offered on a fixed-rate or variable tariff 

Find out how to choose the right energy tariff.

What types of energy can you get?

Usually when people talk about energy tariffs, they are referring to contracts with suppliers of electricity and mains gas, although those in more rural areas may have an energy tariff for LPG – Liquefied Petroleum Gas. Each of these energy categories can be broken down further: 

Electricity

Types of energy these days often refers to how it has been generated – whether it comes from renewable sources like wind and solar power or from fossil fuels like gas and coal. In the third quarter of 2019, the UK started to generate more of its electricity through renewable sources than fossil fuels.

Categories of energy used in electricity production - Ofgem data for Q1 2020 

Mains gas

Less progress has been made in the area of renewable gas. Green energy supplier Bulb strives to use renewable energy sources wherever possible but was only able to source 4% of its customers’ gas from renewable sources between April 2019 and March 2020. The fuel mix for Bulb renewable gas during that time was: 

Bulb relied on carbon-offsetting to reduce the carbon footprint of its customers for the other 96%. Until the UK moves away from gas consumption or more renewable sources can be found, this is likely to remain the best option for reducing climate change.

LPG 

Unlike mains gas, which is fed into people’s homes from pipes in the street, LPG is stored in tanks in the garden or bottles by the gas appliance itself when used as a home energy source. Although LPG providers have made advances in scheduling and delivery, it’s not as convenient as on-tap mains gas. It’s also more expensive at 6.64p per kWh compared to mains gas at 3.80p per kWh so it’s not something you should consider switching to. LPG is the type of gas that’s only used when there is no mains gas alternative. 

If you are forced to use LPG, renewable alternatives are beginning to be introduced – most notably Calor’s BioLPG. The industry’s trade association, Liquid Gas UK, has called for ‘100% transition’ to the bio type of gas by 2040.

How is energy generated and transported?

Until recently, most gas and electricity in the UK was generated by power stations, which run using gas, nuclear energy and coal. That changed in 2019. Now more than half comes from renewable sources, like wind farms, solar power installations, and hydroelectric power stations. 

Distribution companies who operate the UK’s gas and electricity networks then supply energy to homes and businesses in the UK. Which distribution company supplies your energy will depend on where you live. There are eight gas distribution networks in Britain. These are owned by the following companies:

The electricity network in Britain has 14 different network operators. These are owned by six groups:

These distribution companies operate behind the scenes and you won’t usually contact them directly. Instead, you deal with energy companies who have agreements in place with the distribution companies that enable them to use their infrastructure to supply you with energy. This explains why some energy suppliers only operate in certain regions and don’t always appear when you’re searching for the best energy deal. 

Who supplies my energy?

The UK has dozens of energy suppliers. The largest energy ones are known as the big six, and include:

There are lots of other smaller suppliers who can offer more competitive rates than the big six, so it makes sense to compare as many products as possible to make sure you get the best deal.

If you’re not sure who currently supplies your energy, you can follow our guide which can help you find out who supplies your energy.

Is the energy market regulated?

Yes, the energy market is regulated by Ofgem (Office of Gas and Electricity Markets).

Ofgem aims to protect consumer rights by encouraging competition between energy suppliers, promoting value for money and by handling complaints referred to it by the Energy Ombudsman about poor service.

How is energy measured?

Gas and electricity are measured in kilowatt-hours (kWh), which is equal to the amount of energy used to produce one kilowatt for an hour.

Your energy supplier will charge you for each kWh you use. The amount you pay for a kWh of electricity or gas is known as a unit rate. Gas and electric unit rates are a key part of your energy tariff and determine how much you pay for the gas and electricity you use. 

To understand how your gas consumption has been calculated using the gas unit rate, you will need to convert your gas meter reading to kWh. This is because gas meters measure your consumption by cubic meters or cubic feet. Electricity meters are more straightforward because they measure consumption in kWh, so you don’t need to convert your meter reading when applying an electric unit rate. 

You can measure your energy usage by taking regular meter readings or you could ask your supplier to install a smart meter. This lets you track how much gas or electricity you have used in real-time and sends up-to-date meter readings to your supplier.

How much will I pay?

It depends on how much energy you use, and which tariff you pick. It will also be affected by:

You should get a quarterly bill from your supplier which tells you how much you owe for your gas and electricity. You can avoid high estimated bills by providing regular meter readings to your energy company.

Find out how to read your energy bill.

What is a standing charge?

A standing charge is a fixed cost you pay to your energy supplier for providing your home with gas or electricity. It also covers the price of:

All energy suppliers include a standing charge but a few set this charge at £0, so compare energy tariffs to find the best deal.

Find out how to save on your gas and electricity.

How can I pay?

There are several different ways to pay for your gas and electricity, and picking the right one could help you save money:

Is a prepayment meter right for you?

How should I manage my energy tariff?

Once you have chosen an energy tariff, there are several things you need to do to make sure you keep your account running smoothly and avoid overpaying for you gas or electricity:

If you move home, you should also cancel your existing energy supply and set up your gas and electricity at your new address.

Find out how to manage your energy service.

Switching energy supplier

You could save money on your gas and electricity by switching supplier. If you have less than 42 days left on your contract, switching is quick and easy.

Watch out for exit fees if you have signed a contract, as they can be as much as £30 per fuel.

For example, if you have both gas and electricity with the same supplier, you will pay £60 for cancelling your contract early.