Are fixed or variable energy tariffs better? Here we explain the differences between fixed rate and variable rate energy tariffs to help you choose.
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:
- Unit rate – the price you pay for your electricity and gas usage which is charged at pence per kilowatt hours (p/kWh).
- Standing charge – a fixed daily cost for supplying energy to your premise regardless of how much gas or electricity you use. It covers distribution and metering services – like line rental for energy - plus greener energy commitments.
What are the key differences between fixed and variable energy tariffs?
Fixed Energy Tariff
- Your energy is purchased upfront.
- You pay the same price for your unit rates and standing charge for the length of the plan.
- Your contract length is fixed – So it has a set end-date.
Variable Energy Tariff
- We buy your energy upfront & throughout the year.
- The price you pay for your unit rates and standing charges may change if the cost of wholesale energy changes.
- Your Contract length ends with the framework agreement end date.
What are the pros and cons of a Fixed vs Variable energy tariff?
Pros of a Fixed Contract
- Peace of mind – If you’re on a fixed-term contract, your prices will not change.
- Choice of contract Length – You can choose a short- or longer-term contract. These are typically 12, 24 and 36 months.
- Fixing your contract provides budget certainty and costs easier (Especially if you keep a watchful eye on your usage).
Cons of a Fixed Contract
- Your fixed term tariff will not allow you to benefit from drops within the wholesale market.
- Your costs per unit for your energy will not change for the duration of your fixed term tariff because we bought that energy upfront.
- Higher premiums are included to enable the supplier to ‘fix’ your costs.
Pros of a Variable Contract
- Energy is purchased throughout the year in a forward purchasing strategy – Variable Tariffs will benefit if wholesale energy costs fall.
- Annual Quantities (AQ) are aggregated into a ‘basket’ – Providing ‘buying power’ and the ability to make multiple transactions through the delivery period.
- Provides the visibility to manage billing on a month-by-month basis.
Cons of a Variable Contract
- Energy costs may change on a month-by-month basis, making it difficult for long-term budgeting.
- Lower Premiums adds to the risk appetite of the consumer, as prices can rise when purchasing against the wholesale market.
- Manage billing on a month-by-month basis.
So… Should I get a Fixed or Variable energy tariff?
Choosing between our YPO Fixed Tariff or our YPO Variable Tariff (Often referred to ‘Flexible’) can be a challenging decision. We follow the movements of the wholesale market as closely as we can to provide you with the peace of mind, ensuring that you are agreeing to the right term for you.
We all know how quickly the wholesale energy markets can change, and the cost of fixed tariffs will very much depend on market conditions at the time of fixing your contract. Fixed tariffs become less attractive if wholesale prices rise because suppliers must charge more to enable this ‘fixed’ rate.
Lower premiums are added to a variable tariff because of the risk appetite implanted into the forward purchasing strategy when looking to purchase against the wholesale market - As we know, this can be volatile. Variable tariffs may offer lower prices at the outset, but this might not be the case in the future.
Think, if you are happy paying slightly more to get the guarantee and budget certainty, then a fixed tariff would be possible option. However, if you have an appetite towards risk then a variable tariff could be suited when taking advantage of the open wholesale market when energy costs fall.
There are no right or wrong answers when choosing between a fixed or variable energy plan. The best type of energy tariff for you depends on what you think energy prices will do in the future and your attitude to risk.
If you would like to discuss your options or compare tariffs in finer detail - Please contact our YPO Energy Team to discuss your options further:
[email protected]
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