Energy deals are hitting eye-watering levels with some households now being quoted close to £4,500 for a year of gas and electricity if they want to fix the price they pay.
Just two years ago, households could bag an equivalent one-year fixed-rate tariff for £900, so the idea of paying five times that amount may seem ludicrous.
And for many, the current tariffs on offer are so expensive they’re out of the question.
But with wholesale prices rocketing, some experts are suggesting that locking in to a fixed-rate tariff may not be as outlandish as it seems. It may even save money over the long term.
Boiling point: With wholesale energy prices rocketing, some experts are suggesting that locking in to a fixed-rate tariff may not be as outlandish as it seems
SO IS IT BEST TO SWITCH…OR STICK?
Until late last year, fixing your energy tariff was a no-brainer. Energy suppliers saved their best offers for customers who shopped around for fixed-rate deals.
Meanwhile, they punished loyal customers who failed to switch when their tariff ended by shunting them on to more expensive, variable-rate tariffs.
The regulator Ofgem then introduced a cap on these default variable-rate tariffs to limit the amount by which loyal customers could be ripped off.
But the tables turned in spectacular fashion as wholesale energy costs started rising. Suppliers withdrew competitive fixed-rate deals, and price-capped rates became the best option.
Households have been told to stay put on their supplier’s variable rate – unless they are still on one of the old fixed-rate tariffs in which case they should hold on to it as long as they can.
Today, there is not a fixed-rate tariff available that is anywhere near the current price cap of £1,277 a year. Next month, Ofgem will raise the cap by 54 per cent to an average £1,971.
Even then, the cap is cheaper than the fixed deals now on offer.
According to comparison website Uswitch, the cheapest fix is SSE’s 1 Year Fixed v21 tariff. This costs £3,200 on average for a customer paying by direct debit – still £1,229 more than next month’s price cap.
The most expensive one-year fixed tariffs are from Sainsbury’s Energy and Eon at £4,446 – the highest energy tariffs Uswitch says it has ever seen.
Richard Neudegg, head of regulation at Uswitch, says: ‘The fixed deals we are seeing carry a big premium compared to the April cap.
‘Even so, there is a chance some could end up being cheaper than the price cap prevailing at the end of the year.’
WHAT HAPPENS IF PRICES GO ON RISING?
Some experts believe prices could rise so high they make fixed rate deals on offer now look reasonable. The challenge for households is to work out by how much prices will rise – no small ask, even for experts.
Prices are affected by unpredictable factors, such as how long the war in Ukraine will last, how global demand for gas will change – and even the weather.
Events are moving so quickly that even a decision made with the best possible information today may be out of date tomorrow.
Rory Stoves, from comparison website Energyhelpline, says: ‘I think the challenge households have is that the situation is changing on a daily basis.
‘Last week, we were saying that if you get the opportunity to fix for a year at a rate within 15 per cent of the price cap you should do it. Today, most suppliers aren’t offering a fixed deal anywhere near that rate.’
Turbulent times: The situation in the energy market is changing on a daily basis, making it difficult for households to make a call on whether to fix their tariff
WHAT’S THE BEST GUESS RIGHT NOW?
Analysts at Cornwall Insight are energy experts. They use a range of data to predict the future cost of household energy bills. It predicts that the October price cap could be £2,962 – an increase of 50 per cent or £991 on next month’s price cap.
If right, it could pay to fix for 12 months if a tariff comes available in the coming weeks at anything around £2,400 (25 per cent above next month’s cap).
If prices look as if they are going to rise higher than Cornwall is currently predicting, it could be advantageous to fix at an even higher rate.
This would provide possible protection against a higher October cap and any additional price cap rises – next April or before if Ofgem feels they are necessary.
Until now, Ofgem has always re-evaluated the price cap every six months. However, wholesale costs are rising so quickly that it has raised the possibility of reassessing the cap more frequently.
A tariff of about £2,400 is considerably lower than any deal currently available (see table).
However, there is a chance an energy supplier could offer a fixed rate close to this figure – there was one available from Eon as recently as two weeks ago.
Cornwall predicts that the price cap will fall in April next year to £2,274. It could well be wrong, but if so, it makes the case for a current two-year fix a weak one.
The cheapest two-year fix is from Ovo Energy. Costing £3,200 a year on average, 2 Year Fix and Protect is only available for existing customers.
Fixing at this level for two years is unlikely to result in a saving. However, Ovo customers who choose to lock in to it can get out of the deal at any point by paying a £60 exit fee.
If you want certainty and can afford to fix your energy at a cost that is considerably higher than next month’s new price cap, then that may be the right thing to do
Energy Helpline’s Rory Stoves
BE READY FOR NEW DEALS
New deals are rare and short-lived. Eon’s recently withdrawn one-year fix was priced at £1,977 – matching the new cap.
It disappeared within days. Uswitch’s Neudegg says: ‘Just because a deal is available doesn’t mean you should go for it.
‘Make sure you know how much you are already paying for your energy and compare that with the deal available and the price cap.’
He adds that you can sign up to alerts on comparison sites to tell you when a good deal comes along.
WHAT ABOUT PEACE OF MIND?
Some households may feel it is worth paying more to have greater certainty over their bills.
Energyhelpline’s Stoves says: ‘It is difficult to predict what will happen and a lot depends on how long the war in Ukraine goes on and the effect that has on wholesale energy prices.’
He adds: ‘If you want certainty and can afford to fix your energy at a cost that is considerably higher than next month’s new price cap, then that maybe the right thing to do.
‘However, that doesn’t necessarily mean you will get a good deal in the long run.’
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