Variable tariffs explained

Variable tariffs mean your energy prices can change, typically every three months, reflecting fluctuations in the wholesale cost of gas and electricity. These tariffs are often the default for UK households who have not actively chosen a fixed deal or whose previous fixed contract has ended. Understanding how variable tariffs work, particularly in relation to the energy price cap, is key to managing your household energy costs effectively.

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What is a variable tariff?

Defining variable energy tariffs

A variable energy tariff is a type of energy plan where the price you pay for each unit of electricity and gas, as well as the daily standing charge, can go up or down. These price changes are usually driven by the cost of energy on the wholesale market, which suppliers pay to buy the gas and electricity before it reaches your home. Your energy bill on a variable tariff is made up of two main components: the unit rate and the standing charge. The unit rate is the price you pay for each kilowatt-hour (kWh) of energy you use, while the standing charge is a fixed daily fee that covers the cost of supplying energy to your home, including network maintenance and other operational expenses, regardless of how much energy you consume. Both these rates can change under a variable tariff.

Standard variable tariffs explained

The Standard Variable Tariff (SVT) is the most common type of variable tariff and often serves as the default option for many households. If you have never switched energy suppliers, or if your fixed-term contract expires and you do not actively choose a new deal, you will likely be placed on an SVT. SVTs are subject to the energy price cap set by Ofgem, the UK's energy regulator, which limits the maximum unit rate and standing charge suppliers can charge.1

How variable tariffs work

Factors influencing rate changes

The primary factor influencing changes in variable tariff rates is the cost of wholesale energy. This is the price energy suppliers pay to purchase gas and electricity from the market before supplying it to homes. When wholesale costs rise, your variable tariff rates are likely to increase, and conversely, they may fall if wholesale costs decrease. Suppliers are required to provide clear and timely information to customers about any changes to their variable tariff rates.

The role of wholesale energy prices

Wholesale energy prices are the most volatile component of the energy price cap and drive most quarterly changes. These costs are influenced by global supply and demand, geopolitical events, and even weather conditions. Because variable tariffs directly reflect these market movements, they offer a direct link between what suppliers pay for energy and what you pay for your usage.

Pros and cons of variable tariffs

Advantages: flexibility and no exit fees

Variable tariffs offer significant flexibility. They do not have exit fees, allowing you to switch to a different tariff or supplier at any time without penalty. This means if market conditions change or a more suitable deal becomes available, you can move without being tied into a contract. If wholesale energy costs fall, your rates will typically follow suit, potentially leading to lower bills.

Disadvantages: price volatility and uncertainty

The main drawback of a variable tariff is the uncertainty that comes with fluctuating prices. Your unit rates and standing charges can change quarterly, making budgeting more challenging. If wholesale energy prices rise, your bills will increase, even if your usage remains the same. This exposure to market changes means your energy costs can be less predictable than with a fixed tariff.

The energy price cap and variable tariffs

Ofgem's role in protecting consumers

Ofgem, the energy regulator for Great Britain, plays a crucial role in protecting consumers on variable tariffs through the energy price cap. Introduced in 2019, the cap aims to prevent households on default tariffs from being overcharged. It sets a maximum unit rate and standing charge for SVTs, ensuring that prices remain fair even during periods of high wholesale costs. The cap applies to default energy tariffs, which include most SVTs.

How the price cap is calculated and reviewed

The energy price cap is reviewed and updated by Ofgem every three months. These reviews consider changes in wholesale energy prices, network costs, operating expenses for suppliers, and policy costs. Consequently, the prices for variable tariffs can change every three months, typically for January, April, July, and October, reflecting these adjustments. It is important to remember that the price cap limits the maximum amount suppliers can charge per unit of energy and for the daily standing charge; it does not cap your total bill, which still depends on your energy usage. For example, according to Ofgem, the average UK home uses around 2,500 kWh of electricity per year.2

Is a variable tariff right for you?

Assessing your risk tolerance

Deciding if a variable tariff is right for you involves assessing your comfort with fluctuating bills. If you prefer stability and predictable monthly payments, a fixed tariff might be more suitable. However, if you are willing to take a chance on market drops for potentially lower bills and can absorb potential increases, a variable tariff could be an option. Variable tariffs can be particularly beneficial when energy prices are expected to fall or remain stable.

Comparing variable vs fixed tariffs

Fixed tariffs lock in your unit rate and standing charge for a set period, usually between 12 and 18 months, offering price certainty regardless of market fluctuations. In contrast, variable tariffs move with the market, with rates changing quarterly in line with the Ofgem Price Cap. While fixed tariffs provide budgeting stability, they often come with exit fees if you leave early. Variable tariffs, with their lack of exit fees, offer greater flexibility to switch if a better deal emerges or your circumstances change.

Managing your variable tariff

Monitoring market trends

Staying informed about wholesale energy market trends and Ofgem's price cap announcements is crucial when on a variable tariff. These announcements, made quarterly, can help you anticipate potential rate changes and adjust your budget accordingly. Regularly comparing variable tariff rates with available fixed deals ensures you are on the most suitable plan for your household.

Leveraging smart technology for control

Smart meters and energy apps can be powerful tools for managing a variable tariff. They provide transparent, real-time data on your energy usage, allowing you to track consumption and costs effectively. This insight empowers you to identify opportunities for efficiency and make informed decisions about your energy use, especially when rates fluctuate.

The value of customer support

Navigating variable tariff fluctuations can sometimes feel complex. Access to 24/7 human customer support can provide reassurance and expert guidance. This support helps you understand market dynamics, interpret your energy data, and make informed choices about your tariff, ensuring you feel in control of your energy costs.

Managing your energy bills should be clear and easy to understand. Fuse Energy focuses on straightforward pricing, so you can see exactly what you are paying without unnecessary complexity. If you have a smart meter, you can view detailed usage data through the app or website, helping you understand how you can lower your bills. If you do not have a smart meter, Fuse Energy can upgrade your non-smart meter, completely for free. This can make it easier to track spending and make informed decisions about your energy use. Our 24/7 human support team is always on hand with fast response times whenever you need help. Click here to switch to Fuse Energy today. Find out about our mission by clicking here.

References

1. Ofgem. Energy price cap and standing charges explained
2. Ofgem. Review of Typical Domestic Consumption Values