Which energy tariff is best: fixed rate or variable rate?

What’s the difference between a fixed-rate tariff and a variable-rate tariff? Which energy tariff is the best for you and your budget? We take a look.

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Switching supplier is one way to save money on energy bills. But what about switching tariff? To help you work out which energy tariff is best for you, here’s what to think about when it comes to fixed-rate and variable rate energy plans.

What is an energy tariff?

A tariff simply describes how you pay your energy supplier for the gas and electricity you use. 

Broadly speaking, energy tariffs fall into two main groups: fixed-rate tariffs and variable-rate tariffs. Within each group, you’ll find all sorts of other payment plans. These could be based on energy source (for example, green energy tariff) or the way you manage your account (for example an online or paperless tariff). 

The price of your energy includes various different costs, such as:

  • The wholesale cost of your energy
  • Network costs
  • Operating costs of your supplier
  • Government schemes that support environmental and social responsibilities like the warm home discount and green taxes

If you want to find out more about the percentage split between the different costs, head to Ofgem’s breakdown of an electricity bill.


What is a fixed-rate energy tariff?

This means you pay a fixed amount for each unit of gas or electricity you use for an agreed length of time. On your bills, this unit is measured in kilowatt-hours (kWh).

Most fixed-rate tariffs run for 12 months, but two-year fixed-rate plans are also available. 

Remember, it’s only the unit cost that stays the same. Your energy bills can still go up or down depending on the total amount of energy you use. 

Fixed-rate tariff pros

  • Usually one of the cheapest tariffs available.
  • If your energy use is consistent, your bills will be predictable, which can help you stick to a budget.
  • If the wholesale price of gas or electricity increases, you’ll be protected from price rises.  

Fixed-rate tariff cons

  • You must commit to a contract for at least 12 months.
  • You’ll have to pay exit fees if you want to break your contract. 
  • If the wholesale price of gas or electricity falls, you won’t benefit from any price reduction. 


What is a variable-rate energy tariff?

The unit cost of your gas or electricity can change according to the wholesale price. 

If you’ve just moved home or never agreed a contract with your supplier, it’s likely that you are on a variable tariff known as a default or standard tariff. 

Variable-rate tariff pros

  • You could save money on bills if the cost of energy falls.
  • Tariffs are flexible and you aren’t tied to a contract.
  • No exit fees if you want to change to a different tariff.

Variable-rate tariff cons

  • Budgeting can be difficult as prices can rise and fall.
  • Typically more expensive compared to fixed-rate tariffs.
  • Can be time-consuming to compare the cheapest variable tariffs and switch accordingly.  

Which is the best energy tariff?

Like most things, it really depends on what’s important to you. 

If you want predictable energy bills that allow you to balance a household budget, then a fixed-rate tariff could be the most sensible option. 

Be sure to make the most of your switching window when your contract nears its end. In most cases, your supplier will send you a letter or email four weeks before the contracted end date. This gives you ample time to search for a new fixed-rate deal. 

On the other hand, if you have a higher tolerance for risk and don’t need to stick to such a rigid budget, a variable-rate tariff could offer greater flexibility. 

For more ways to save money on energy, take a look at these five apps to boost energy efficiency in your home. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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