Are fixed energy plans a good idea?

energy prices

At the time of this update, Npower are offering a four year fixed price energy plan, giving customers certainty over their bills until the end of March 2021.

With three of the Big Six providers having announced imminent price rises, this and other fixed term plans look attractive - but is it a good idea to fix the price of your energy?

It depends on what's going on with energy prices in general, as well as our personal preferences, but at present the prevailing mood is that it's worth it.

A couple of years ago, when wholesale energy prices were falling dramatically, those who had signed up to a fixed energy deal would have been forgiven for feeling slightly sick as one by one the biggest suppliers announced cuts to their standard variable prices.

So why fix? To help answer that question, we'll look into how much they cost and the factors affecting those prices - but in the end, it's up to each of us whether the reasons for or against win out.

How much do fixed energy plans cost?

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Most suppliers now offer at least one or two fixed energy plans, with the majority giving customers the chance to commit to a tariff for one or two years.

Npower's four-year plan is the only one of its kind out there - and it's not the first time they've dared offer the longest-term fixed priced energy deal on the market: in spring 2013 they were the first to introduce three year fixed plans.

Under the terms of their Super Fix March 2021 tariff, the average dual fuel bill paid by monthly direct debit will cost customers £1,130 a year until March 31st 2021.

Here's one of the reasons fixed energy plans often don't appeal: in December 2016, Ofgem estimated that an average Big Six customer with a standard variable tariff would be paying £1,066 a year for their energy.

Since then, we've seen a raft of price rises announced, the effect of which is thought to take that average bill up to £1,100 per year - but that still means the fixed deal is £20 a year more expensive.

But that's just one - somewhat unusual - fixed energy plan: shopping around reveals a cluster of fixed plans that would cost that average household around £890 a year - a saving of £240.

Why do some fixed deals cost so much?

So why the difference in price?

There are two main reasons: the length of the deal, and the market conditions when a particular fixed tariff became available.

Market conditions

The general trend over time is for prices to go up. Energy prices are no exception to this - in fact, they're usually rising at a far greater rate than most other everyday costs.

During their two year investigation into the retail energy market, the Competition and Markets Authority (CMA) said that between 2009 and 2013, average energy prices rose by far more than the rate of inflation: electricity increased in price by 24% and gas by 27%.

The CMA investigation
June 2016: Investigation a "waste of time"
March 2016: Backing down on price control
July 2015: Customers "paying too much"
Feb 2015: Standard tariffs 12-13% higher
Oct 2014: Competition "not working"

Wholesale prices famously dropped by as much as 30% in 2015 - and yet the biggest suppliers only cut their SVTs by around 5% each.

However, those lower prices combined with increasing competition from smaller independent energy companies led to the appearance of a swathe of much cheaper fixed energy deals.

Since then, wholesale prices have started to creep back up.

The smaller providers can't afford to buy ahead in the same way that the Big Six can, so they've gradually had to increase the prices of their cheapest fixed deals.

As a result of these increases, we're now in the situation where the cheapest fixed deals are more than £100 more expensive than they were this time last year.

And as suppliers change their fixed deals quite frequently to keep up with both the competition and any shifts in wholesale prices, we can expect them to keep getting more expensive again, at least for a while.

Long versus short fixes

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The other general rule is that the shorter the fix, the cheaper it'll be.

By offering fixed plans, the energy companies are hedging their bets. Like us, they don't know quite how energy prices are going to change in the near future.

Shorter fixes are often cheaper because they're less of a risk for the energy suppliers: if prices do rise substantially their customers could be saving a small fortune - but not for long.

If prices fall meanwhile, customers may not be saving as much as they might have, but they're still likely to be saving overall - and if not, they don't have as long to wait until they're free to switch to a better deal.

The longer the fixed term, the bigger the risk the energy companies are taking, so they're far more likely to play it safe by offering a deal that looks only marginally cheaper than their SVT in the short term, hoping that customers will be attracted by the thought of locking in before prices get any higher.

To return to Npower's four year fix: it was launched at the same time as they announced their 9.8% SVT price rises - and while it's more expensive than the average annual SVT bill, it's still 4.8% cheaper than Npower's new SVT.

Npower are counting on their customers assuming that SVTs will continue to increase over the next four years, making their deal look all the more attractive as time goes on.

How fixed is 'fixed'?

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While it is possible for customers to leave a fixed energy deal, they will often incur penalties for doing so.

The companies that charge exit fees generally set them at about £30 per fuel.

Some people are put off shopping around for a better deal because of the risk of incurring fees - but if switching supplier would result in a bill that saves us more per year than the exit fees will cost us, then it's worth doing.

Also remember that suppliers are obliged to give us at least 42 days' notice that a fixed deal is due to end, and once we've less than six weeks until our deal expires, we can switch without incurring an exit fee.

Other people are put off by the thought that they'll incur a penalty fee if they have to move house. Suppliers would generally rather we stayed with them, so as long as we're happy to keep getting our energy from them in the new place, we shouldn't have to worry.

Making a decision

It would be naive to assume that the energy companies aren't hoping to profit from fixed deals.

There's been plenty of coverage of bills shooting up as customers on shorter fixed deals reach their end and get moved across to much more expensive SVTs, and of existing customers being refused access to their supplier's cheapest deals.

But for a large proportion of us, being willing to shop around in the first place, and then being prepared to spend a bit of time comparing deals again in a year or so will be enough to help keep more of our money in our pockets rather than those of our supplier.

And even the less immediately attractive longer term fixed deals can be of benefit to some: people with fixed incomes may well appreciate the security and reassurance of locking into a deal protected against price increases for the foreseeable future.


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