Energy regulator Ofgem is warning households to think about the pitfalls before rushing to fix their energy rates when deals start to come back onto the market.
The Think Before You Fix social media campaign is urging people to check if fixed-rate energy tariffs are right for their circumstances, especially as better deals may come on to the market if, as energy experts predict, prices continue to fall.
An Ofgem spokesperson said: “It’s good news that we’re seeing some choice returning to the market – but consumers should always make sure they’re making decisions based on all the information, including what energy prices might do over the lifetime of any deal. Right now, we anticipate the next price cap will be lower, but future price cap levels remain uncertain.
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“We know that some customers really value certainty and stability in what they pay for their energy – but everyone should be aware that if prices fall, customers on fixed deals may be locked into higher prices for longer. Customers should make up their own minds based on what matters most for them, and we expect suppliers to help explain the situation when offering these products.”
The advice comes as energy supplier Ovo is offering its first deal below the Government’s £2,500 cap on typical household bills with a one-year fixed tariff of £2,275 to existing customers. That deal undercuts the Government’s energy price guarantee (EPG), which reduces the amount people can be charged per unit of gas or electricity, to an annual equivalent of around £2,500 for a typical household in Britain.
Ovo, which has around four million customers, said it launched its new tariff because customers wanted “the security of a long-term fix to protect them against the continuing energy price uncertainty”, but Money Saving Expert Martin Lewis echoed Ofgem's advice, saying: "People need to be very careful not to just jump on a fix because it costs less than they’re paying right now."
He said: “If you’re on a standard tariff, the rates you pay are governed by a cap. That cap is currently set by the EPG, and will stay roughly stable until the end of June. After that, because wholesale rates – the rates energy firms pay – have dropped, it’s likely the price cap will drop, and on current predictions that means you’ll start paying 20 per cent lower rates than now.”
Experts are predicting that average bills may fall to just over £2,000 a year this summer, bringing huge relief to families swamped by spiralling energy costs for the past 18 months. And the predicted fall in the Ofgem energy price cap will bring the rate to under the energy price guarantee (EPG) rate of £2,500, meaning that households will feel the benefit of a reduction in their costs - if the predictions are correct. The predicted drop also would mean that for the first time in almost two years, households could see the return of competitive fixed-price energy tariffs.
Energy analysts at Cornwall Insight says energy bills for a typical household could drop to around £2,024 for the second half of 2023, £476 below the capped EPG rate of £2,500. It then predicts that between October and December, the average energy bill will be around £2,076 - so a slight rise from the £2,024 level in the summer, but still £424 lower than the rate under the EPG.
A lot of the confusion stems from the fact that the energy price cap and the EPG are two systems that have the same purpose - capping unit rates and standing charges for standard variable tariffs - but run together.
The important thing to remember is whichever one has the lower level is the one that suppliers will use to set their prices. The Government sets the level of the EPG in response to the price cap level and Ofgem sets the level of the price cap in response to wholesale energy prices.
So while the EPG is set at £2,500, the level of the price cap is set at £3,280. The fixed deals coming back to market are priced at around £2,275 - lower than the EPG. However, it's likely that the next price cap level will be around £2,024, so the EPG would become obsolete. This means that a customer signing up to a fixed deal at about £2,275 now would probably be paying more than those on standard variable tariffs in a few months' time.
However, Ofgem said there were benefits to fixing if you chose to do so, for example the certainty of knowing what you will pay as a unit rate for your energy over an extended length of time which may help with household budgeting. Fixing also provides protection if prices start to increase again, but the compromise is you won’t be able to take advantage of cheaper prices if they continue to fall.
Are you keen to fix your energy tariff? Join in the conversation below
The regulator offered the following dos and don'ts of switching now:
Consider exit fees: You may change your mind about your fixed deal and want to switch. If this happens after your 14-day cooling-off period, you might have to pay an exit fee. Not all tariffs have them but some do.
Look at the length of the deal: Most deals are for 12 or 24 months. During this time the price cap could rise or fall depending on market conditions, so consider how long you would like to stay locked in for.
Stay informed: Keep a close eye on the market and run regular comparisons to see what deals are on offer. By signing up to alerts, you will be able to stay close to what’s happening in the energy market and be informed when a good deal comes along.
Don’t go for the first deal you’re offered: Just because a deal is available doesn’t mean it is a good one or the right one for you. As fixed deals return to the market, you may want to use reputable switching websites to assess deals with different suppliers
Switching for renters: Being in rented accommodation does not stop you from switching energy suppliers and taking advantage of a fixed deal if it is right for you.
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