Should you avoid a fixed energy tariff?

Are long-term fixed energy deals all they’re cracked up to be? Or could a variable deal be better for your budget? We crunch some numbers to see.

The general consensus among experts is that gas and electricity bills are going to rise in the next few years.

Just last month First Utility warned that energy costs could overtake mortgage repayments by 2025.

That’s not so far-fetched when you consider resources are dwindling and the cost of implementing green schemes are adding to our bills.

So with this grim future in mind it’s perfectly logical to think about locking into a fixed rate energy deal to ride out the hard times – and the longer the better.

Traditionally fixed tariffs have offered up to 18 months of certainty but now there’s a raft of longer lasting deals offering to fix your bills until 2016.

But in the rush to fix for as long as possible are we ignoring the benefits of variable tariffs?

Fixed vs. variable

Fixed rate energy tariffs offer a set price on the unit costs of gas and electricity. This type of deal can offer future savings if prices rise during the term and can prevent any shock increases as long as your consumption stays the same.

But going for a fixed energy deal is a bit of a gamble in a similar way to signing up for a fixed rate mortgage. You’re protected from price rises (which you usually pay a premium for), but not price drops and leaving early will often incur penalties.

With a variable rate energy deal you’re likely to benefit straight away from a cheaper offer instead of waiting for future price rises to bring in the savings. But you take the gamble that energy prices won’t rise – which doesn’t seem likely – in the hope that should they stay the same or fall you will benefit.

However, it's worth bearing in mind that energy companies have to give 30 days’ notice of a price hike, during which time you can switch onto a better deal.

Taking the long view

With longer-lasting fixed rate energy deals available it’s easy to assume these will be better value.

But when are the savings delivered and how big are they likely to be?

Below I have used a 10% year-on-year price rise to compare how the cheapest variable tariff and the longest lasting fixed rate deal stack up over the course of three years and three months.

For the comparison I am going to use the npower Price Fix September 2016 as it’s the longest lasting deal around at the moment with over three years of fixed prices. The deal will cost an average household £1,318 a year.

And to compare I have used the best variable rate deal on the market – the Sainsbury’s Energy Online July 2014, which costs just £1,157 for those with an average use of gas and electricity.

Surprisingly Sainsbury’s discounted variable offers a bigger saving, assuming a 10% year-on-year price rise. The deal could save a household £68.79 if it lasted as long as the npower offer.

The savings offered from the npower deal only start to stack up and overtake the Sainsbury’s deal in the third year and remaining three months of the offer. So for people looking for instant savings a variable deal looks more attractive than a longer-lasting fix in this scenario.

I should point out that the table with the variable costs assumes that Sainsbury’s offers a 4% discount on its Clear & Simple tariff rates beyond 31st July 2014, when this deal ends. But the same comparison could be done with other variable deals without the deadline like the first:utility iSave V15. Using this deal the npower deal offers savings of £84.21 over the term – not a lot considering the £119 premium it had in the first place.

Choosing a deal

Variable deals won’t be for everyone, but neither will fixed rate tariffs.

Fixed deals will suit those that need absolute certainty, while variable deals are more appropriate for those with a bit more flexibility in their budgets.

Variable deals are cheaper than fixed rate deals early on. Fixed tariffs can only offer potential future savings.

That said, fixed rate deals are cheap at the moment, so it is worth considering them, especially those without cancellation fees.

The npower Online Price Fix February 2015 is just £23 more expensive than the Sainsbury's Energy Online July 2014. Plus it doesn’t come with any cancellation charges, while Sainsbury’s charges £30 per fuel.

Energyhelpline.com have rounded up the cheapest variable and fixed rate deals on offer at the moment to help you decide what’s best for you.

Cheapest variable rate deals

*Based on typical gas and electricity bill, for someone who has never switched, costing £1,420

Cheapest fixed rate deals

*Based on typical gas and electricity bill, for someone who has never switched, costing £1,420

All calculations are for an average usage dual fuel household paying by monthly direct debit. Average usage as defined by OFGEM as 16,500 kWh pa of gas and 3,300 kWh pa of electricity

Compare gas and electricity tariffs and see if you can save

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