Energy Tariffs Explained

There are several different types of energy tariffs available, so it can be hard to know how they all work. Find out whether fixed or variable energy, or another kind of tariff is right for you.

Rhiannon Philps Published on 20 September 2021.
Energy Tariffs Explained

We all need energy in our home, whether it’s for lighting, heating, cooking, or charging our phones. With gas and electricity playing such a crucial role in our daily lives, finding the right energy supplier and tariff is an important task for every household.

Energy bills are one of the main expenses a household needs to pay, and many people are spending more than they need just because they are on an expensive tariff or they haven’t looked at other suppliers.

Understanding the differences between energy tariffs can be confusing, so here we highlight the key features of each tariff and explain how they work.

What are energy tariffs?

Energy tariffs are simply how you pay for your gas and electricity. Energy suppliers will offer different tariffs which charge customers in different ways, including fixed-rate and standard variable tariffs.

There are also dual fuel tariffs that offer both gas and electricity, as well as more environmentally-friendly green tariffs.

Find out more about the different kinds of energy tariffs below.

Fixed energy tariff

Also known as fixed-rate or fixed-price tariffs, fixed energy tariffs guarantee the cost of your gas and electricity for a set period of time. It means the cost of your energy won’t change for the duration of the contract, which will often be 12 months or longer.

However, this doesn’t necessarily mean your payments will stay the same during the contract. While the cost of a unit of energy remains fixed, you will still need to pay more if your energy consumption increases.

Fixed energy tariffs protect you from any rises in the cost of energy and they are usually cheaper than a supplier’s standard variable tariff. However, double-check the costs as suppliers can set fixed-rate tariffs that are more expensive than their default tariff, as fixed tariffs are not bound by Ofgem’s price cap.

Once a fixed tariff ends, you can sign up for a new tariff with your existing supplier or a new supplier. If you don’t do this, your supplier will automatically put you on its standard variable rate.

Pros

  • It is typically cheaper than a supplier’s standard variable tariff and prepayment tariffs.
  • The cost of your energy won’t change, which can make it easier to budget.
  • You won’t be affected by any rises in the cost of energy during the contract.

Cons

  • You may need to pay an exit fee if you want to change tariffs or suppliers in the middle of your contract.
  • If the cost of energy falls, you won’t benefit from the cheaper prices.
  • Once your fixed deal ends, you need to remember to sign up for a new fixed tariff or you’ll be moved on to the supplier’s default tariff, which is normally more expensive.

Variable energy tariff

The cost of energy on a variable energy tariff, also known as a standard or default tariff, will depend on the price of energy in the market. This means your payments can go up and down as the cost of energy changes, which can make it difficult to budget as you don’t know how much you’ll pay for energy each month.

When energy prices are low, variable tariffs can be cheaper than fixed-rate tariffs. However, they will often be a more expensive option overall as you will be charged more when energy prices rise.

There is a limit to how much energy suppliers can charge you on standard or default tariffs, thanks to the price cap set by the energy regulator, Ofgem. This is the maximum that suppliers can charge for each unit of energy, preventing them from overcharging customers for gas and electricity.

Ofgem reviews this price cap twice a year so, if the cost of energy rises significantly and suppliers need to pay more for units of energy, they can raise the limit. For this reason, on 1 October 2021, the cap will rise by £139 a year to £1,277 (based on the usage of a typical customer), so suppliers can start charging customers more per unit of energy.

Variable rate tariffs are normally a supplier’s default tariff – if you don’t opt for a fixed-rate tariff, for example. So if your fixed-rate tariff ends and you don’t switch to another one, you will end up on the supplier’s default tariff, which is likely to cost you more.

Standard variable tariffs are flexible, so you can switch to a different contract or change supplier without facing any extra charges.

Pros

  • You can take advantage of any drops in energy prices.
  • They are flexible, so you can switch contracts or suppliers without paying any penalties.

Cons

  • Typically a more expensive way to pay for energy than a fixed-rate tariff.
  • If energy prices rise, your energy bills are likely to rise too.
  • Your payments can fluctuate according to the energy market, which can make it difficult to budget.

Prepayment tariff

You need a prepayment meter to use this tariff. It works in a similar way to a pay-as-you-go phone, as you pay for energy in advance before you actually use it.

With this tariff, you top up the prepayment meter using a card, key or token. You can do this online, by phone, at the Post Office, or in shops that have PayPoint or Payzone services. Once you’ve paid for your energy, you use it until you need to top up again. You may get a notification when you’re running low on credit.

If you don’t top up in time, there is a risk you could end up without gas or electricity.

Even if you don’t use any gas or electricity on a particular day, you will still need to pay a daily charge. The cost of this fee will vary, but it will typically be around 28p per day.

While you only pay for what you use, prepayment is typically the most expensive way to pay for your energy.

Many households have prepayment meters for a number of reasons. For example, if you have missed energy payments and are in debt with your energy supplier, you may be switched to a prepayment tariff to help you with your finances.

Tenants may also find the home they are renting has a prepayment meter. Some landlords may choose to install them if they are worried about tenants falling behind on their bills.

As long as you meet certain criteria, such as passing a credit check and not owing any money to your energy supplier, you should be able to switch from a prepayment tariff to a different tariff.

Ofgem sets a price cap that energy suppliers can charge for prepayment tariffs. This is rising to £1,309 per year from 1 October 2021 (based on a typical customer), an increase of £153.

Pros

  • You only pay for the energy you use.
  • It can help you to budget and manage your bills.

Cons

  • It is typically the most expensive way to pay for energy.
  • There is a risk of losing gas or electricity if you forget to top up.
  • As there are not as many tariffs to choose from, prices won’t be as competitive.

Economy tariffs

Economy 7 and Economy 10 tariffs charge you two different rates for gas and electricity, one rate during ‘peak’ times, and a cheaper rate during ‘off-peak’ times. The exact times are set by the supplier, but night time is likely to fall in the off-peak period.

There are seven off-peak hours in a day on an Economy 7 tariff, and 10 off-peak hours on an Economy 10 tariff.

In Scotland, these economy tariffs are more commonly known as white meters.

These ‘time of use’ tariffs aim to help you to save money on your gas and electricity bills, by encouraging you to use your energy during the cheaper, off-peak periods.

However, there are not many of these tariffs available. Some suppliers may not offer these tariffs to new customers, so it could be difficult to switch to one – especially as it could require a new meter to be installed.

Pros

  • It can help you to reduce your energy bills if you make the most of off-peak times.


Cons

  • It can be difficult and inconvenient to time your energy usage for off-peak hours.
  • Energy costs during peak times can be higher than on other tariffs.
  • You need a specific type of meter to accommodate this tariff.
  • Not as many suppliers offer these tariffs, especially to new customers.

Dual fuel tariffs

This tariff means you get your gas and electricity from one supplier and pay for them together. It is a common way of paying for your energy and can be simpler than paying for your gas and electricity separately from different suppliers.

Dual fuel tariffs can be cheaper than separate gas and electricity tariffs, but this may not always be the case.

You can choose fixed-rate or variable-rate dual fuel tariffs.

Pros

  • It’s easier to manage your bills if you have the same supplier for gas and electricity.
  • It can be cheaper than getting your gas and electricity from different suppliers.
  • There are lots of suppliers and tariffs available to choose from.

Cons

  • In some cases, dual fuel tariffs may be more expensive than having separate gas and electric tariffs.

Green tariffs

Suppliers may offer green tariffs that are meant to be more environmentally-friendly than other tariffs. However, being on a green tariff doesn’t necessarily mean the energy you use is all from renewable sources. The energy supplied to your home comes from the National Grid, which contains energy from a mix of renewable and non-renewable sources, regardless of which tariff you are on.

While only a few companies can supply 100% renewable electricity, there are suppliers that source at least some of their renewable electricity direct from UK generators, such as wind or solar farms, using power purchase agreements. Some suppliers even generate their own green electricity.

Other suppliers may offer guarantees that the amount of energy you use is offset by generation of energy from a renewable source. For example, a supplier may buy renewable energy through Renewable Energy Guarantees of Origin (REGO) certificates to match the amount of energy you use.

However, there is some controversy surrounding these certificates as suppliers could purchase these REGO certificates from a third party and continue to buy energy from non-renewable sources. This is known as greenwashing, as suppliers are not helping to generate renewable energy but can still market their tariffs as green.

Suppliers may also participate in carbon reduction schemes, such as planting trees. They may offset their gas too, as there is not enough renewable gas, such as biogas, to match demand.

Because there are different ways a tariff can claim to be green, it’s worth researching exactly what makes it green so you choose an option that you are comfortable with.

Green tariffs can sometimes be more expensive than a basic fixed-rate tariff, so compare prices and tariffs from different suppliers to see what’s available.

Pros

  • It helps the environment by promoting renewable energy and cutting carbon emissions.
  • Green tariffs are offered by big suppliers as well as smaller companies, so there’s lots of choice.

Cons

  • Green tariffs can sometimes be more expensive than other tariffs.
  • Some companies may greenwash, to make their tariff appear more environmentally-friendly than it really is.

Image Source: Getty Images

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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