Fixed energy deals: are they worth it?

6 October 2008

Unless you’ve been living in the wilderness for the past few months, you may have noticed your energy prices going up – and not by a small amount. Rapidly growing wholesale costs of natural gas and oil have meant that the energy companies have scrambled to keep up – and that means increased bills for you.

Let’s assume you’re doing everything you can to save money. You’re only using gas and electricity when absolutely necessary, you’re switching lights off, your house is well insulated, you use energy-saving light bulbs, etc. You can control those things, but energy prices will continue to rise regardless – and that’s where fixed-price energy deals come in.

Fixed-rate deals may sound like a great idea, and in many ways they are, but there are a few things to consider before you go ahead.

Advantages of fixing

• Fixed energy deals offer security. What you pay now is what you will pay for the duration of the fixed period. Most energy companies will fix their rates for one or two years, but it can be longer.
  
  So long as your other living costs stay more or less the same, this will enable you to plan how much money you have left over each month without worrying about sudden rises in your outgoings.
  
  
• The longer your fixed period, the more you should get for your money. For example, if you are on a fixed-rate deal for two years, and energy prices rise 25% in a year, it shouldn’t be long before the amount you are paying is below what you would have paid on a standard variable-rate energy plan.

Disadvantages of fixing

• When you start a fixed-rate deal, you will pay around 20% more than if you had opted for a standard variable-rate package. This means that energy prices will have to rise by 20% before the deal becomes cost-effective.
  
  In recent months, we have seen a 15% rise in energy prices, with further rises set to come – so taking up a fixed deal a few months ago would have been a good move.
  
  However, in a steady economy it’s debatable whether prices would have risen so quickly. As the economy recovers, there’s every chance prices could stabilise, or even go down slightly, in which case a fixed-price deal could cost you more.
  
  
• Most companies will charge you for leaving a fixed-rate deal. So if you decide you want to leave half way through the deal, it will cost you to do so.
  
  
• The longer your fixed period lasts, the more prices are likely to rise – so you may face a big jump in prices when your deal comes to an end.

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