Avoid British Gas' Latest Tariff

British Gas' tracker may seem appealing, but one Fool explains why it's too early to switch into this relatively new type of tariff.

When suppliers, such as British Gas or Powergen, buy gas and electricity from producers, they buy at what's called 'wholesale prices'. In turn, we buy it from the suppliers at 'retail prices', which are higher so that they can make a profit.

In my round-up of the market back in February, I told you about npower's Wholesale tracker tariff, which was the first of its kind. The premise is simple: the price you pay for gas and electricity goes up and down with wholesale prices. This tariff is closed to new applicants at present, which might be just as well, considering my review.

But now British Gas (BG) has introduced its own wholesale tracker, which starts from 4 December. Every quarter it updates its prices based on wholesale prices movements for the preceding months:

When British Gas' Market Tracker updates its prices

You can sign up for this tariff now, but you'll simply be on British Gas' standard tariff until 4 December. On that date, BG will get the average wholesale price for the previous three months and adjust your future price accordingly.

It won't track wholesale prices exactly, because BG has costs other than the wholesale prices it pays for gas and electricity. Very roughly, half its cost are other costs (called 'fixed costs'), such as billing and metering. So, if the wholesale price rises or falls by 10%, your bill will probably change by more like 5%.

Also, after 31 August 2008, BG will review its fixed costs. In any quarter when BG reviews its fixed costs, it may result in the tracker prices diverging from wholesale prices.

The Fool's opinion

A few months ago I pointed out British Gas' fix-and-fall tariff. It appealed to many people, but it was the only fix-and-fall tariff available at that time. Therefore, BG had no pressure to offer it at a good price, which is why I said people should wait until more such tariffs appear.

Now the media are spreading rumours that wholesale prices are expected to rise (although so far I am yet to see any firm evidence).

Perhaps BG has though, hence this new tracking tariff. It will appeal to lots of people, because many of us are fed up of reading that suppliers are failing to pass on the savings they make when wholesale prices fall.

But, just like the Fix-and-Fall tariff, the Market Tracker suffers from a lack of competition. In my opinion, there needs to be a dozen or so trackers before the prices will come down to a reasonable level.

If you need more specific evidence, BG's tracker is linked to its most expensive tariff. This means, instead of beginning the tracker from a starting point of BG's cheap Click Energy tariff, you're starting from its standard tariff, which is way off the cheapest products on the market.

Many commentators say that you have to think carefully about whether this is suitable for you. I say that this is unsuitable for all Fools. Until there is more competition with wholesale trackers, I'd stay clear.

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