Standard variable vs fixed rate – which energy tariff should you go for?

Standard variable vs fixed-rate tariff – the fall in wholesale energy costs may mean our energy bills drop in the coming months

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If you’re looking for the best gas and electricity deals, then one of the things you may be considering is whether you should go with a standard variable or fixed-rate energy deal.

In the past fixed-rate energy tariffs were usually cheaper than the default standard variable tariff. That all changed with the energy crisis.   

But with wholesale gas prices falling, energy bills are set to fall from July as a result of the energy price cap being reduced

If wholesale costs continue to fall, we may see energy suppliers once more launch fixed-rate tariffs, which lock in the unit price you pay for electricity and gas and remain unchanged until the fixed period ends.

Here, we explain what you need to know if you're considering a fixed energy tariff.

What is a fixed-rate tariff?

With a fixed-rate tariff, what you pay per energy unit used is fixed for a set period - typically 12 to 18 months. This guarantees the cost of your energy will not go up for a set amount of time.

Your monthly bill depends on how much energy you actually use, but you are protected from gas price rises, which when they go up, won’t affect how much you pay because you will have locked into a fixed price. 

Once the fixed-rate deal ends, you are automatically switched to a standard variable-rate tariff. 

Fixed-rate deals were typically used as a way to compete for new business, but the high energy costs mean providers haven't been able to provide enticing offers. 

What is a standard variable energy tariff?

The standard variable rate means what you pay per unit of energy will fluctuate monthly depending on the wholesale price of energy. If prices go up, you pay more and if they drop, you may pay less. 

You are not locked into a standard variable rate like you are with a fixed-rate deal. 

Millions of people ended up on a standard variable rate because they simply forgot to switch after their fixed-rate deal ended.

Before the energy crisis, standard variable rates usually cost more than fixed-rate deals. But there was some protection provided by the energy price cap, which is updated every three months. It limits the unit price for gas and electricity that energy companies could charge.

But with bills spiralling out of control and the cap increasing to unaffordable levels, the government introduced the Energy Price Guarantee (EPG) to freeze the unit price of energy. It meant the typical household would pay around £2,500 a year for their energy use, and applies to anyone on a standard or default tariff, which is now the majority of us.

Importantly it doesn't replace Ofgem's price cap, which means standard variable tariff prices can ‒ and have ‒ fallen below the EPG level.

From July, the energy price cap is being reduced to £2,074 for the typical household. That will run until September, with energy analysts Cornwall Insight forecasting that the cap will drop again to £1,960 for the final three months of the year.

The verdict

Currently it is incredibly difficult to switch to a fixed-rate deal. Most suppliers simply aren’t offering them, except the odd exception like Ovo, which has a one-year fixed tariff for existing customers only. 

As a result, most of us have little option but to continue on our lender’s standard variable tariff. However, with wholesale prices falling and the energy price cap dropping in July, it’s possible suppliers will soon feel able to launch cheaper fixed-rate tariffs. 

For now, the best thing to do is sit tight.

John Fitzsimons
Contributing editor

John Fitzsimons has been writing about finance since 2007, and is a former editor of Mortgage Solutions and loveMONEY. Since going freelance in 2016 he has written for publications including The Sunday Times, The Mirror, The Sun, The Daily Mail and Forbes, and is committed to helping readers make more informed decisions about their money.