Should I choose a fixed or variable energy tariff?

What is an energy tariff?

An energy tariff is how energy providers charge a customer for the gas and electricity they use. An energy tariff is made up of two costs which make up your bill:

1. Unit rate – the price you pay for your electricity and gas which is charged at pence per kilowatt hours (p/kWh)
2. Standing charge – a fixed daily cost for supplying energy to your home regardless of how much gas or electricity you use. It covers distribution and metering services – like line rental for energy - plus greener energy commitments, costs of failed suppliers from the Supplier of Last Resort (SOLR) process and help for vulnerable customers.

Read our guide to understanding your energy bill if you want help making sense of the information on your bill. You can also learn more about standing charges.

What are the differences between a fixed and a variable energy tariff?

What’s a fixed rate tariff?

A fixed energy tariff means your unit rates and standing charge stay the same for the length of the contract you agree with your energy supplier.

Remember – it’s the cost per unit rate and standing charge that’s fixed and not your bill. How much you pay is based on how much you use and is worked out by multiplying the unit rates for gas or electricity by the amount used plus the standing charge.

What’s a variable rate tariff?

This is usually a supplier's default rate, or standard variable tariff. A variable energy tariff means that your unit rates and standing charge can increase or decrease. Suppliers might change the price of your unit rates and standing charge if the cost of wholesale energy changes, or if Ofgem - the UK’s energy regulator - changes the price cap. This means your bill could rise from month to month, even if you used the same amount of energy.

What is the energy price cap?

Ofgem maintains an energy price cap which they review regularly. This sets a limit on the maximum amount that suppliers can charge for each unit of gas and electricity you use and sets a maximum daily standing charge (what you pay to have your home connected to the grid) for customers on a standard variable default tariff. Ofgem reviews and sets the price cap every three months based on the wholesale energy cost. Fixed-term tariffs are not covered by the energy price cap.

Which is better fixed or variable energy?

Pros of fixed energy tariffs

• Peace of mind - if you’re on a fixed-term tariff and Ofgem increase the price cap, or your supplier announces a price rise, your prices won’t change
• Lots of choice – you can choose a short or longer contract length or lowest monthly cost. Some tariffs also come with additional benefits, or renewable options
• It can make costs easier to budget if you keep a careful eye on energy usage

Cons of fixed energy tariffs

• If energy prices drop when you’re on a fixed rate tariff, then you won’t get the benefit
• Most providers charge an exit fee if you leave a fixed rate contract before it ends. Ofgem has ruled that your energy supplier can't charge you any exit fees if you switch within the last 49 days (or seven weeks) of your contract (or from the date you received your Statement of Renewal Terms if earlier)
• You’ll need to act at the end of a fixed term tariff if you want to fix your energy prices again

What are the pros and cons of a variable energy tariff?

Pros of variable tariffs

• If wholesale energy costs fall, then the price of variable tariffs often falls too
• Variable plans don’t usually come with exit fees, so you have the flexibility to switch at any time
• If you’re on a standard variable default tariff you’re protected by the energy price cap, which is the maximum you can be charged for your energy use. The energy price cap is reviewed every three months by Ofgem - the energy regulator and can go up or down
• Your supplier will always give you advance notice before increasing your prices

Cons of variable tariffs

• If prices rise, so does the unit rate and standing charge you pay, so your bill will increase
• Can make it more difficult to budget
• If you choose a variable tariff, then it’s advisable to keep an eye on prices and consider changing to a better deal if prices rise sharply

Should I get a fixed energy tariff?

Choosing between a fixed or variable rate energy tariff is a bit like choosing between a variable or fixed mortgage deal. Both have their merits.

The cost of fixed price tariffs will depend on the conditions of the energy market. Fixed deals become less attractive if wholesale prices are high because suppliers have to charge more.

Although a variable tariff may offer the cheapest prices at the outset, it might not in the future. If a fixed tariff isn’t the cheapest option, think if you are happy to pay slightly more to get the guarantee that your energy prices won’t go up.

There are no right or wrong answers when choosing between a fixed or variable energy plan. The best type of energy tariff for your home depends on what you think energy prices will do in the future and your attitude to risk. Compare energy suppliers to find the best deal for you.

My fixed energy tariff is ending, what should I do?

Your energy supplier will contact around 49 days before your current fixed energy tariff ends. They might offer some other fixed deals you can change to.

If you don’t switch to another fixed rate tariff, your energy supplier will automatically move you to a standard variable tariff.