With energy bills on the rise, it may be tempting to switch

 

to a fixed rate payment instead of variable, but that may not necessarily be the best option for your situation

2022 will be remembered for a lot of things, but without question the single thing most will remember is the massive impact from rising energy bills.

 

With

 

reports that energy bills would rise from £1900 a year for the average home to £3500, having already risen once in 2022,

 

many ask

 

how the mounting costs

 

can be afforded.

 

The possible results from not capping energy prices could mean not just the forced closure of small businesses and venues due to the drop in footfall and trade but, more importantly, the risk to householders of losing their homes from missed payments and rising costs.

To address this

 

the government announced that

 

bills would been capped at £2500 for the next two years, with a review set to take place in 2024, which is of major short-term relief to many households in the UK.

 

The talk about rising bills fuelled another important discussion as to whether changing to a fixed rate was better than a variable rate for paying bills. As the issue is only believed to be a short term solution, we will take a look at both to help you determine what is best for your circumstances.

 

What is variable rate?

A variable rate is an energy provider’s default rate, otherwise known as a standard variable tariff (SVT). This way, you essentially only pay for what you use and are charged at the rate of the tariff.

 

The tariff can and does fluctuate, so it goes up and go down – on the one hand, this can make it difficult for you to budget, but on the other, you can save money depending on how much you use or take advantage of when it is low to use it more at little extra cost.

 

Either way, you are charged at the rate of the price cap and what you pay is determined by that.

 

Generally speaking, variable rate customers set up a direct debit with their energy provider – either monthly or quarterly – and after an estimation by their energy provider for annual usage, a charge comes out of the

 

account either 12 times a year or four.

The

 

estimation may not be totally accurate as it takes into account a number of variables that may change for your throughout the year, so there is the possibility of either under or overpaying during the year. This is especially notable in the winter, when

 

heating may be used more than estimated due to unforeseen adverse weather conditions or even mechanical failures eg. leaks and faults.

Over a 12-month period, if you have overpaid, you will receive either credit – which you can use to essentially get months of energy for free – or a rebate, at which point point your annual estimate is recalculated

 

taking into account the actual usage. It is common to build up credit during the summer which is then used over the more energy consuming winter period.

 

Equally, If you have underpaid, your bills will increase following a new estimate (again based upon your previous year's consumption) and,

 

as you are technically in debt to the energy provider, they

 

will seek to be paid the difference.

 

Quick tip: You can ask your energy provider to set up a variable direct debit, which takes out what you have used. While this is beneficial in the summer, do be aware that the monthly payment could increase significantly

 

in the winter – especially if prices spike.

 

So how is fixed rate different?

A fixed rate contract is exactly that – you agree a set price for energy when you start and you’re normally locked in for a few years. For example, whatever the rate of electricity is when you start, will be the same when you end.

 

This doesn’t mean you can go wild and use as much as you like – it just means however much you use will always be priced by the cost per unit you agreed at the start.

 

This makes it easier to manage your budget, as you can calculate how much your bill will be by working out what you have used and multiply that by the agreed charge, then add on the standing charge.

 

As you’re in a contract, you will need to either look to renew, find another one or switch to a variable rate when it expires, so just be aware that your current provider

 

may offer entising incentives to encourage you to renew.

 

If you do choose to change before your contract termination date, there is often a

 

penalty for early cancelation, so make sure you are 100% comfortable with what you agree to before you initiate the move.

 

Much like the variable rate direct debit option, whatever you use for the month will be withdrawn

 

– but you can calculate your bill from your meter reading and checking your agreed rate.

 

Importantly, given the rise in prices, fixed rate terms do not apply to the price cap – so if you have secured a good rate,

 

regardless of what is happening in the world, your bill will stay at the same for the length of your contract.

 

What should I choose then?

This is where the price cap announcement has changed things – drastically, too. Before the freeze, the advice would’ve been to look at fixed rates as a matter of urgency.

 

This advice that was shared by the likes of Martin Lewis (aka Money Saving Expert - www.moneysavingexpert.com)

 

as panic set in and energy customers were desperately looking for ways to manage their bills in this unstable climate.

 

At present, as

 

the price cap is now in place, the advice, generally speaking, is to stick with what you have, as there are currently no fixed deals that will save you money at this moment in time.

 

What is worth noting for those already on fixed terms though, is that what you pay may actually be reduced and will definitely not go up – which will be a huge sigh of relief for thousands across the country.

 

This advice applies to those who have started fixed term deals over

 

the last nine months, as what you pay will fall in line with the new price guarantee.

 

It is still worth keeping an eye out for fixed term deals – especially as we approach 2024 as the price cap will be reviewed again that year, so there could be some deals to be had.

Regardless, we do understand just how much stress and anxiety this has caused people – we all feel it too and it’s important we stick together in times like these to help each other out, which is what we are trying to with articles such as these.

 

 

For more tips on how to find the best energy deal, why not try Money Saving Expert's energy bill calculator to see if you are on the best deal for your circumstances -

 

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