Demystifying Energy Tariffs: Fixed vs. Variable Rates

Emily Thompson combines her academic background in business and environmental management to help businesses navigate sustainability.

With experience in broadband services and water conservation, Emily guides businesses towards practices that protect the environment without compromising performance.

When not consulting, Emily enjoys gardening and cooking with homegrown vegetables.

Understanding energy tariffs is of utmost importance for households and businesses in the United Kingdom. Energy tariffs determine the price you pay for your gas and electricity consumption, and having a clear understanding of the different types of tariffs available can help you make informed decisions that can potentially save you money and provide financial stability. 

The two main types of energy tariffs in the UK are fixed rates and variable rates. In this comprehensive article, we will explore each type in depth, discuss their advantages and considerations, compare them, and provide practical tips to help you choose the right tariff for your specific needs and circumstances.

In this guide

• Understanding Fixed Rate Tariffs
• Unveiling Variable Rate Tariffs
• Comparing Fixed and Variable Rates
• Understanding the Impact of Market Factors
• Practical Considerations for Decision-making
• Tips for Switching Tariffs

• Factors to Consider before Switching Tariffs

Understanding Fixed Rate Tariffs

 Fixed rate tariffs are energy contracts that offer customers a set unit price for their energy consumption over a specified period, typically ranging from one to two years. Here’s a detailed breakdown of fixed rate tariffs:

Definition and Features

Fixed rate tariffs provide price stability by locking in a specific unit price per kilowatt-hour (kWh) of energy consumed for the duration of the contract. This means that regardless of any fluctuations in the energy market or changes in wholesale prices, your unit price remains unchanged. Additionally, fixed rate tariffs often come with a fixed standing charge, which covers the fixed costs incurred by the energy supplier.

Benefits of Fixed Rate Tariffs

Price Stability and Budgeting: One of the primary advantages of fixed rate tariffs is the ability to accurately predict and plan your energy expenses. With a fixed unit price, your bills will remain consistent, making it easier to budget effectively and avoid unexpected cost spikes.

Protection against Price Increases: Energy prices have historically shown an upward trend, and a fixed rate tariff shields you from these increases during the contract period. This can be particularly beneficial if you have a tight budget or want to maintain stable costs over the long term.

Long-term Planning: By opting for a fixed rate tariff, you gain the advantage of being able to plan your finances and budget for the entire duration of the contract. This stability can be especially valuable for individuals or businesses seeking certainty and financial planning.

Considerations before Opting for a Fixed Rate Tariff

Contract Length and Exit Fees: It is important to carefully consider the contract length associated with fixed rate tariffs. While longer-term contracts may offer more stable rates, they can also restrict your ability to switch suppliers or tariffs without incurring early termination fees. Assess your long-term plans and balance them against the potential costs of breaking the contract early.

Comparison with Variable Rates: Before committing to a fixed rate tariff, it is crucial to compare it with available variable rate options. Variable rates can offer greater flexibility and may be more cost-effective in certain market conditions. Evaluating the pros and cons of each option will help you make an informed decision.

Tips for Selecting a Fixed Rate Tariff

Assessing Personal Energy Consumption: Review your historical energy consumption data to estimate your future energy needs. By understanding your usage patterns, you can choose a fixed rate tariff that aligns with your energy consumption, ensuring that you don’t end up overpaying for energy you don’t use.

Comparing Different Fixed Rate Offers: Take advantage of online comparison websites and tools to compare fixed rate tariffs from various suppliers. Look beyond the unit price and consider other factors such as contract length, customer service ratings, and additional benefits or incentives offered. This comprehensive assessment will help you identify the most suitable option.

Considering Customer Reviews and Satisfaction: While comparing tariffs, don’t forget to read customer reviews and satisfaction ratings of energy suppliers offering fixed rate tariffs. This will give you insights into the customer service quality, billing accuracy, and overall customer experience provided by each supplier, helping you make an informed decision.

Unveiling Variable Rate Tariffs

Variable rate tariffs, also known as standard or default tariffs, do not offer a fixed unit price for energy consumption. Instead, the prices for these tariffs fluctuate in line with market conditions and changes in wholesale energy prices. Let’s explore variable rate tariffs in detail:

Definition and Characteristics

Variable rate tariffs have prices that can rise or fall throughout the year, reflecting the changes in the energy market. Unlike fixed rate tariffs, the unit price for energy consumption is not predetermined and remains subject to market fluctuations. Variable rate tariffs often have no fixed contract duration, allowing customers to switch suppliers or tariffs without incurring penalties.

Advantages of Variable Rate Tariffs

Potential for Savings during Market Fluctuations: Variable rate tariffs offer the potential to benefit from reduced prices when energy costs decrease in the market. If wholesale prices fall, your unit price may decrease as well, leading to savings on your energy bills. This flexibility can be advantageous if prices remain lower over an extended period.

Flexibility in Changing Suppliers: Variable rate tariffs provide the freedom to switch energy suppliers or tariffs without facing early exit fees or contract restrictions. This can be advantageous if you prefer to actively monitor the market and switch suppliers when favourable rates become available.

Factors to Consider when Choosing a Variable Rate Tariff

Market Trends and Forecasts: Keeping abreast of energy market trends and forecasts is essential when considering a variable rate tariff. Understanding market conditions and having insights into potential price fluctuations can help you determine whether variable rates align with your energy consumption patterns and financial goals.

Personal Financial Situation and Risk Tolerance: Variable rate tariffs carry inherent uncertainty, as prices can rise unexpectedly. Before opting for a variable rate tariff, evaluate your financial stability and assess your risk tolerance. If you are comfortable with potential price increases and have the means to handle them, a variable rate tariff may be suitable for you.

Tips for Selecting a Variable Rate Tariff

Monitoring Energy Usage and Market Changes: Regularly track your energy consumption and stay informed about market changes that could impact prices. Monitoring your usage patterns and staying up to date with market trends will empower you to make timely decisions regarding your tariff, such as considering a switch if advantageous.

Reviewing Supplier Pricing Policies: When evaluating variable rate tariffs, it is important to understand how different suppliers calculate their variable rates. Some suppliers pass on wholesale price changes directly to consumers, while others may have their own pricing policies. Comparing and understanding these pricing policies will help you make an informed decision.

Exploring Price Comparison Websites and Tools: Take advantage of reputable price comparison websites and online tools that provide comparisons of variable rate tariffs from various suppliers. These resources offer insights into pricing structures, customer reviews, and additional benefits, enabling you to evaluate and choose the most suitable variable rate tariff.

Comparing Fixed and Variable Rates

When deciding between fixed and variable rate tariffs, it’s crucial to consider various factors to make an informed decision. Let’s delve deeper into each aspect:

Assessing Personal Preferences and Priorities

Determine whether price stability or potential savings through market fluctuations align better with your energy needs and financial goals. Consider the following:

• Price Stability: Fixed rate tariffs provide predictable bills, which can be beneficial if you prefer stable monthly expenses and want to budget with certainty. You’ll know exactly how much you’ll pay for your energy consumption each month, regardless of any changes in the energy market.
• Potential Savings: Variable rate tariffs have the potential to offer savings when energy prices decrease. If you’re willing to take on some level of risk and monitor the market for opportunities, variable rates may allow you to benefit from lower prices during certain periods.

Consider your risk tolerance and willingness to actively monitor the energy market. Ask yourself:

• Risk Tolerance: Fixed rate tariffs offer protection against price increases, which can provide peace of mind and financial stability for those with a low risk tolerance. Variable rates, however, come with the risk of price fluctuations, which may not be suitable for those who prefer predictable costs.
• Market Monitoring: Variable rate tariffs require actively monitoring the energy market to take advantage of potential savings. Consider whether you’re willing and able to keep track of market trends, news, and pricing changes to make informed decisions about your energy tariff.

Understanding the Impact of Market Factors

Be aware of external factors that influence energy prices in the UK, such as:

Global energy prices 

Energy prices are primarily governed by supply-demand dynamics, market speculation, and geopolitical events. The Russia-Ukraine conflict and resulting sanctions on Russia, coupled with an ongoing global fuel shortage, significantly affected energy prices in 2022, leading to a 100 point rise in the fuel energy price index between August 2021 and March 2022. The price of crude oil, which is the main raw material for a variety of motor fuels and industrial products, rose from a pandemic low of less than 20 U.S. dollars to a 15-year high of over 120 U.S. dollars by mid-2022. Price changes in natural gas, coal, and uranium, the dominant fuel types used for electricity and heat generation, often reflect changes in electricity demand​.

U.S. energy trends and projections

The Annual Energy Outlook 2023 by the U.S. Energy Information Administration (EIA) highlights several key trends and projections:

Energy-related CO2 emissions: These are projected to fall 25% to 38% below the 2005 level by 2030 due to increased electrification, higher equipment efficiencies, and more zero-carbon electricity generation. The reduction could be as high as 45% below 2005 levels in 2030 under certain scenarios​​.

Renewable energy: There is expected to be substantial growth in renewable energy generating capacity across all regions of the U.S., supported by declining capital costs, government subsidies, and growth in installed battery capacity. Solar generating capacity could grow by about 325% to 1019% and wind generating capacity by about 138% to 235% by 2050 compared to 2022 levels​​.

Electrification: There is projected to be increased electrification in the end-use sectors, including more heat pumps and electric vehicles and increased use of electric arc furnaces in the iron and steel industry. However, natural gas-fired heating equipment is expected to continue to account for the largest share of energy consumption for space heating in U.S. residential and commercial buildings through 2050​.

U.S. production and exports: High international demand is expected to lead to continued growth in U.S. production. Combined with relatively little growth in domestic consumption, the U.S. is projected to remain a net exporter of petroleum products and natural gas through 2050 in all scenarios considered by the EIA​.

Practical Considerations for Decision-making

Assess your energy consumption patterns and stability

Evaluate your energy consumption habits to determine whether they are consistent or fluctuate. If your energy usage remains relatively stable over time, a fixed rate tariff may provide more certainty. However, if your consumption varies significantly or you have the ability to adjust your energy usage, a variable rate tariff may offer more flexibility.

Evaluate your financial stability and risk tolerance

Consider your financial stability and ability to handle potential price increases or market fluctuations. If you have a limited budget and prefer to avoid unexpected cost spikes, a fixed rate tariff may be more suitable. On the other hand, if you are financially stable and comfortable with managing potential price fluctuations, a variable rate tariff can offer opportunities for savings.

By carefully considering these factors and conducting thorough research, you can make a well-informed decision about whether a fixed rate or variable rate tariff aligns better with your preferences, financial goals, and risk tolerance. Keep in mind that energy tariff choices are not permanent, and you can switch tariffs in the future if your circumstances change or new opportunities arise.

Tips for Switching Tariffs

Switching energy tariffs in the UK is a straightforward process that can potentially save you money and improve your energy experience. Here are practical tips to help you navigate the switch effectively:

The Energy Switch Guarantee: 

The Energy Switch Guarantee is a voluntary initiative supported by most energy suppliers in the UK. It ensures that the switching process is smooth, efficient, and completed within 21 days. Under this guarantee, your new supplier takes care of the entire switch, including notifying your current supplier, arranging the transfer of your energy supply, and ensuring uninterrupted service during the transition. If any issues arise during the switch, the guarantee ensures they are resolved promptly and with minimal inconvenience to you.

Comparison and Research:

Before initiating the switch, it’s important to research and compare different energy tariffs and suppliers. Use online comparison tools and websites to compare prices, contract terms, customer reviews, and additional benefits. This helps you identify the most suitable tariff for your needs and ensures you make an informed decision.

No Physical Changes Required:

Switching suppliers does not involve any physical changes to your energy infrastructure. You do not need to replace meters, rewires, or modify your existing energy setup. The process primarily involves administrative tasks, such as changing your billing and supplier details. This means that the switch can be completed smoothly without any disruption to your energy supply.

Meter Readings:

As part of the switching process, you may be required to provide meter readings to both your current and new suppliers. This ensures that your final bill from your current supplier is accurate, and your new supplier can start billing you correctly from the switch date. Providing accurate meter readings is essential to avoid any discrepancies in your energy consumption.

Contract Termination:

Once you have selected a new supplier and agreed to switch, your new supplier will handle the contract termination process with your current supplier. They will notify your current supplier of the switch and the intended switch date. It’s important to ensure that you have fulfilled any contractual obligations, such as notice periods or contract end dates, to avoid any potential penalties.

Communication and Updates:

Throughout the switching process, it’s important to maintain communication with both your current and new suppliers. They will provide updates on the progress of the switch and any additional information or actions required from your end. It’s recommended to keep records of all communication and confirmation of the switch details.

Billing and Payments:

After the switch, your new supplier will start billing you based on the agreed tariff and contract terms. Ensure that you understand the payment methods, billing frequency, and any discounts or incentives offered by your new supplier. Set up any necessary direct debit or online billing arrangements to ensure smooth payment processes.

Post-Switch Verification:

Once the switch is complete, review your first bill from your new supplier to ensure accuracy. Check that the tariff rates, meter readings, and other details align with the agreed terms. If you notice any discrepancies or have any concerns, contact your new supplier’s customer service department for resolution.

Factors to Consider before Switching Tariffs

Contract Terms and Penalties:

Review the terms and conditions of your existing contract to determine any exit fees or notice periods. Some fixed rate tariffs may have penalties for early termination. Consider the financial implications of switching and calculate whether the potential savings outweigh the costs.

Supplier Reputation and Customer Service:

Research and assess the reputation and customer service ratings of potential new suppliers. Look for suppliers with a track record of reliable service, good customer feedback, and responsive customer support. Online reviews and independent customer satisfaction surveys can provide valuable insights.

Payment Methods and Billing Options:

Consider the payment methods and billing options offered by different suppliers. Some suppliers may provide discounts or incentives for specific payment methods, such as direct debit or online billing. Evaluate which payment method suits your preferences and whether it aligns with any potential cost savings or convenience factors.

Step-by-step Guide to Switching Energy Tariffs

• Research and Comparison: Utilise online comparison tools and websites to compare tariffs from different suppliers. Consider factors such as price, contract terms, customer reviews, and additional benefits. Thoroughly evaluate the options to identify the most suitable tariff for your needs.
• Informing Current and New Suppliers: Contact your current supplier to notify them of your intention to switch. Provide the necessary details, such as your account number and intended switch date. Simultaneously, communicate with your chosen new supplier to initiate the switch process. The new supplier will guide you through the necessary steps, such as providing meter readings and setting up your new account.
• Contract Termination and Start Dates: Coordinate the termination of your current contract and the start date of your new contract to ensure a seamless transition. Be mindful of any notice periods or early termination fees associated with your current contract. Coordinate with both suppliers to ensure a smooth handover without any gaps in your energy supply.
• Post-switching Considerations and Ongoing Monitoring: After switching tariffs, closely monitor your energy bills to ensure accuracy and identify any potential issues. Check that your energy usage aligns with the new tariff rates and that you receive bills based on the agreed terms. Take regular meter readings and keep track of your consumption to avoid any billing discrepancies. Stay informed about market trends and consider switching again if more favourable tariffs become available.