When choosing your energy supplier and tariff, you will have no doubt heard the terms ‘fixed rate’ and ‘variable rate’ mentioned, but do you really understand what they mean and what is best suited to you?
What Is A Variable Rate Tariff?
‘Variable rate’ refers to a tariff where the supplier can, at any time, increase, or decrease the unit rate of your gas or electricity, meaning that your bills may fluctuate even though you are using the same amount of energy. This is usually in line with the wholesale cost of energy, but not always, as other factors in the energy market can have an impact on the consumer. Ultimately, the supplier has the facility to change the unit price if and when they need to!
There is often a negative stigma attached to variable tariffs, where the focus tends to be on the fact that your bills could potentially increase with very little notice… However, it’s not all bad! Don’t forget that you are safeguarded by the energy price cap, which prevents the supplier from increasing the per unit rate above a set amount and should the wholesale price of energy fall, there is always the potential that your bills could decrease too.
What Is A Fixed Rate Tariff?
A fixed rate tariff is one where the per unit price quoted at the start of your agreement, will be honoured throughout the duration of your plan, providing that there are no extenuating circumstances outside the suppliers’ control. It is very important to remember that this does not necessarily mean that your bills will be the same every month – It is the per unit rate that is fixed, not the total amount you pay and therefore, the more energy you use, the more your bills will be.
Fixed Rate Tariffs – Pros and Cons
- Your supplier may announce a sudden increase in the per unit rate of energy, however, this will not affect you. Your per unit rate will remain at the rate you agreed when signing up to your plan, making budgeting easier.
- For a 12-month agreement, fixed rate tariffs are more often than not (but not always – do your research!) cheaper than variable tariffs. Should you wish to secure your rate for a longer period, i.e. a 24-month plan, you may pay a premium for the privilege.
- Almost all suppliers offer a fixed rate tariff, so you can make your choice and be secure in the knowledge that you truly have secured yourself the best deal for your circumstances.
- Your supplier should notify you in plenty of time that your plan is coming to an end – The responsibility ultimately lies with you, but assuming you receive this notification and are on the ball, you should be able to perform an energy comparison and secure yourself a new deal for your next term.
- There is a 49-day window at the end of your fixed rate plan where you can exit early without incurring an early exit fee. This means you can potentially switch to a cheaper deal earlier than expected!
- If your suppliers’ price per unit drops, unfortunately you won’t feel the benefit.
- During the term of your plan you may find a better deal, however, unless you are within the last 49 days of your agreement, you won’t be able to switch without paying an early exit fee.
- If you’re busy and not able to be proactive at the end of your plan, you will automatically be rolled onto your suppliers’ standard variable tariff, which will typically have much higher unit rates.
Variable Rate Tariffs – Pros and Cons
- If your supplier reduces their per unit rate, then, assuming you do not increase your usage, you will also experience a fall in your bills.
- It is very rare for a variable tariff to have an exit fee. This provides you with the opportunity to continually search the market for the best deal for you and switch as and when you find one, without paying a penalty.
- In line with point 2, variable rate tariffs tend not to have an end date. This means that, should you wish to, you can stay on the same tariff for as long as you like.
- Variable rate tariffs often start out as a cheap option, but there is no guarantee that they will stay this way. If your supplier increases their per unit rate, then you will inevitably experience a rise in your payments.
- As the unit rate can fluctuate at any time, then a variable rate can make budgeting difficult. You will struggle to forecast your bills, as you can’t predict if / when the supplier chooses to make a change.
So, which Tariff Is The Best Option?
Unfortunately, there’s straightforward answer to this question.
Choosing a variable tariff means you are not tied into a particular plan and therefore have the opportunity to ensure you are always on the best deal for your circumstances, however, this requires investing time and effort, which, in reality, not everyone has. Failing to monitor the marking could mean you fall victim to a sudden price increase.
Choosing a fixed rate tariff may mean you miss out on the occasional price drop, or not have the opportunity to select a cheaper deal should it become available without incurring an early exit fee; however, it offers peace of mind when it comes to budgeting and means that you can essentially forget about it for the term of your plan.
Both options have their pros and cons, it really comes down to your time, priorities and financial situation.