Variable rate electricity and gas tariffs (which are also referred to as variable price plans) do just what their name suggests: they vary.
They don’t go up and down randomly; they ‘track’ wholesale energy prices. So if wholesale prices rise or all, your variable energy rates may do not same, but not always, and not immediately. Whether your rates are about to change, your supplier will give you reasonable notice (at OVO we give 30 days’ warning).
If you’re on a variable rate tariff, it’s the basic price of a unit (kilowatt hour/kWh) of energy that can go up and down.
So if fuel prices go up, but you’ve built up a reasonable amount of credit, your monthly Direct Debit might not need to rise straight away.
On the other hand, if fuel prices fall, but your energy supplier has set your monthly payment slightly lower than the amount of energy you’re using, you’ll need to keep paying the same amount to catch up.
When there’s a change in wholesale costs, your energy supplier will let you know as soon as possible if it’s going to affect your variable rate prices. Depending on the amount of notice they’ve agreed to give you (so that’s 30 days if you’re an OVO customer), the rates shown in your meter/s will change after that amount of time.
Variable rate energy plans let you take advantage of reductions in wholesale energy prices – and yes, they really do fall sometimes.
For example, in 2015 oil prices plunged to their lowest level since 2009. Falls like this can have a knock-on effect on electricity prices, as some power stations are fuelled by oil.
At the time of writing this guide (October 2015), gas prices are also at their lowest level since 2010, and fierce competition among energy suppliers means unit costs could drop even further. A variable rate energy plan can allow you to make the most of these falls.
According to the Daily Telegraph, in October 2015 wholesale electricity was 20% cheaper than it was at the start of 2014, and wholesale gas is 37% cheaper (1).
If you were on a fixed rate tariff, rather than a variable one, you wouldn’t be able to benefit from any price cuts, as your unit costs would be fixed for the length of your contract (usually one year).
The other advantage of being on a variable rate energy plan is that you’re not tied to a contract, so you can switch to a new supplier whenever you want without paying any exit fees (also known as termination fees or cancellation charges). However, at OVO, we don’t charge exit fees anyway, even for our fixed rate customers, as we believe you should stay with us because you want to, not because you have to.
You can also switch to a different plan whenever you want – so if you think prices are going to start rising, you can ask your supplier to upgrade you to a fixed plan.
On the whole, prices in general tend to rise over time rather than fall; in fact, energy prices have been rising faster than the average salary(2).
It’s been predicted that there will be a 35% increase in the world’s need for energy by the year 2040(3). This may seem a long way off, but it shows that the pressure on our planet’s oil and gas supplies is likely to increase, pushing prices up from year to year.
So if you’re on a variable rate energy plan, even if you’re currently enjoying price cuts, your rates are likely to go up sooner or later.
At the moment, energy firms are also having to meet various efficiency, green energy and investment standards set by the government, which are increasing their running costs. This means that prices are likely to rise by 30-40% or more4 over the next few years, and a variable rate tariff contract would mean you’re vulnerable to those rises.
Basically, with a variable energy tariff you’re gambling on prices falling. If they do, you’re a winner. But if energy prices rise, you’d probably be better off on a fixed rate plan.
Not necessarily. Some suppliers can drag their heels over passing on falls in wholesale prices to their customers.
Also, with most suppliers, wholesale energy costs account for less than half of your energy bill. You’re also paying for the costs of delivering your energy, meeting the government’s renewable standards and other initiatives, taxes, operating costs and, of course, allowing your supplier to make a profit.
So even if you’re on a so-called standard variable tariff and you’ve read or heard that energy prices are falling, you can’t take it for granted that your prices will fall accordingly – or the fall might be so small that you hardly notice it.
If you’re on a variable rate plan you probably don’t actually have a contract, and you can leave the plan whenever you want.
I’m currently on a fixed rate contract, but it’s about to end. Should I switch to a variable rate energy plan?
We can’t advise you which is better – it’s entirely up to you. If you think energy prices might rise, you should consider re-fixing. But if you think prices are likely to fall, you might want to switch to a variable rate plan.
With most energy suppliers, you don’t need to make a conscious effort to switch to a variable energy plan. If your provider hasn’t heard from you by the time your plan ends, they’ll probably just roll you on to their standard variable rate plan automatically. However, the unit rates of most standard plans are quite high, so make sure you look into this before you decide what to do. Your supplier should be able to give you personal illustrations to show you how much you’d pay on various plans, based on the amount of energy you’re currently using.
(3)The outlook for energy - ExxonMobil
OVO Energy Ltd, registered office 1 Rivergate Temple Quay Bristol, BS1 6ED, company no. 06890795 registered in England and Wales, VAT No. 100119879
Additional terms and conditions
Please see below for full terms and conditions on 33% renewable electricity, 3% interest rewards, exit fees and saving claims.
1Monthly cost - Representative monthly direct debit costs based on a non-economy-7, dual-fuel, medium user (3100 kWhs elec. and 12500 kWhs gas) paying in advance by direct debit, including online discount. All rates correct as of 23/08/16, but may go up or down.
2Weekly cost - Representative weekly costs based on a non-economy-7, dual-fuel, medium user (3100 kWhs elec. and 12500 kWhs gas). All rates correct as of 23/08/16, but may go up or down.
3Pay Monthly Savings are based on the average estimated annual costs for new PAYM OVO customers quoted through the OVO website (based on household and/or consumption information provided by those customers), compared to their current supplier and tariff. Comparisons taken between 01/01/2016 and 11/10/16. Incl VAT. Actual savings may vary according to your current supplier or tariff, individual tariff options, household information, consumption and location.
4Pay As You Go Savings are based on the average estimated annual costs for new PAYG OVO customers quoted through the OVO website (based on household and/or consumption information provided by those customers), compared to their current supplier and tariff. Comparisons taken between 01/01/2016 and 11/10/16. Incl VAT. Actual savings may vary according to your current supplier or tariff, individual tariff options, household information, consumption and location.
We include almost twice as much renewable electricity as the national average: At least 33% of electricity in all of our tariffs comes from renewable sources. The national average, according to Ofgem as at March 2014 was 16.7%. For more information please visit this page.
33% of your electricity comes from renewable sources: 33% renewable electricity as standard as of 1st April 2015. Renewable electricity is generated from wind, solar, geothermal, wave, tidal, hydro, biomass, landfill gas, sewage treatment plant gas and biogas.
3% interest: Calculated at 3% per year, paid monthly based on number of days in credit and the amount left in your account after you’ve paid your bill. OVO Interest Reward is capped at 12 times the amount of the current direct debit amount and is available to customers paying by advance direct debit. Terms apply: http://www.ovoenergy.com/terms/
95% of new customers save when switching to OVO: Based on all new customer signups between 01/02/2016 and 31/07/2016
94% of surveyed customers would recommend us: OVO conducted a survey of their customers in between 1st January 2016 and 15th April 2016. Out of 15,312 customers who responded, over 94% rated OVO 6+ when asked 'how likely would you be to recommend us to a friend and family, on a scale of 1 to 10.
Britain's top rated energy provider: Britain's top rated energy provider in the Which? 2015 satisfaction survey. Survey conducted in October 2015. Awarded in January 2016.