The ultimate guide to variable energy tariffs
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).
Volatility of electricity prices (wholesale)
Volatility of gas prices (wholesale)
I pay monthly by Direct Debit – will my payments change straight away?
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.
I’m on a Pay As You Go plan – will my prices change straight away?
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.
What are the benefits of variable rate energy tariffs?
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.
What are the disadvantages of a variable rate energy 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.
Do suppliers always pass on price cuts to their variable rate customers?
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.
What happens at the end of a variable tariff contract?
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