Should you fix your energy bills as price cap is tipped to hit £4,427?
With energy bills now set to rocket even higher than feared, many anxious customers are questioning if they should lock in to a fixed deal.
Experts yesterday warned that a typical household will be paying £3,582 a year when the energy price cap rises in October. Average annual bills are then expected to peak at a devastating £4,427 a year next spring.
At present, there is not a single fixed deal available that is cheaper than the current £1,971 price cap.
So you certainly wouldn’t save any money in the short-term by locking in now.
Stick or switch? Money Mail asks the experts to help you work it all out
But if bills do continue to soar, some think a fixed tariff could perhaps shield them from further pain down the line.
The problem is that many of the fixed deals on offer are quite simply eye-watering.
One customer with energy giant Octopus was recently quoted a staggering £10,032 for a 12-month deal.
Here, we ask the experts to help you work out if you stick or switch…
> Essential reading: How much will the energy price cap forecast add to your bills?
WHEN WILL BILLS RISE?
About 22million households are now on their supplier’s standard variable tariff, which is protected by a price cap. This means their provider cannot charge more per unit of power than what is dictated by watchdog Ofgem.
But with wholesale energy prices soaring in the wake of the war in Ukraine, the cap is steadily rising.
And whereas the regulator previously set it twice a year, Ofgem announced last week it would now change it every three months.
The regulator said that reviewing the price cap more frequently will help stabilise the chaotic energy market and reduce the risk of further supplier failures.
But it also means higher prices will be passed on to customers more frequently.
Dr Craig Lowrey, principal consultant at analysts Cornwall Insight, adds: ‘Many may consider the changes made by Ofgem to the hedging formula, which have contributed to the predicted increase in bills, to be unwise at a time when so many people are struggling.’
The cap has already increased from an average of £1,277 to £1,971 this year.
Now Cornwall Insight forecast it could jump to £3,582 in October, £4,266 in January, and reach £4,427 by April.
This would push up a typical monthly bill from £164 to £298, then to £355 before rising again to £369.
It would cost us £4,874 a year to fix
Theo and Liane Shantonas would see their bills jump by 125 per cent if they switched to the one-year fixed tariff British Gas is offering.
The London couple, who are on the energy giant’s standard variable deal, currently pay £180 a month to heat their three-bedroom terraced home.
But when Theo logged into his account to see what fixed options were available, he could not believe the prices.
Theo and Liane Shantonas would see their bills jump by 125% if they fixed their deal
The British Gas tariff, fixed until October next year, would cost them £4,874 a year, or £406 a month.
Theo, 30, says: ‘I do feel it’s manipulative of British Gas to charge so much for a fixed deal — especially as the exit charge would amount to £200.’
The couple, who have a two-year-old son and five-month-old daughter, are already concerned about their finances.
And Liane, 27, may return to work from maternity leave early to boost their household income.
Theo, who works for a printing company, says: ‘My wife and I are effectively priced out of the fixed-deal market.
‘We could not afford to fix at any of the prices on the market at the moment.’
HOW DO FIXED DEALS WORK?
If you are locked in to a fixed tariff it means the price per unit of power will remain the same for a set period of time — typically one or two years.
Often the fixed daily standing charge — which covers administration costs — will stay put too. It doesn’t mean you can use as much power as you like without paying more. But it does mean you will be charged the same rates regardless of what happens to wholesale prices.
In the past, it’s always made sense to opt for a fixed deal as they were typically far cheaper than sitting on a price-cap protected standard tariff. This is no longer the case. Suppliers know wholesale prices are expected to rise for a while and so have hiked up the cost of fixed deals in line.
It means most are far more expensive than the current price cap.
The situation is certainly worrying Liam Lewis, an NHS worker from Bournemouth, who would see his bills skyrocket from £1,655 to £3,834 a year if he locks in to a 12-month fixed deal.
He and his wife Alice, a part-time NHS nurse, are already paying £100 a month — £60 more than this time last year.
So the couple were stunned to see the latest quote for a fixed deal would triple their monthly payments to £300.
The couple, who live in a two-bedroom semi-detached home with their 19-month-old son Arlo, are on energy giant Octopus’s flexible tariff.
But they are now so worried about rising bills they are not sure whether to fix in to an expensive deal or stay put.
Liam, 38, says: ‘We have a young family and nursery fees have already increased for the second time this year. It’s difficult to see where we are going to get this extra money from’
Experts warn that fixed-rate tariffs often come with hefty exit fees if you wish to get out early
WHAT DEALS ARE ON OFFER?
Tariffs that are available for anyone to switch onto are few and far between. Suppliers often reserve them for existing customers only, rather than advertising them on the open market.
For example, British Gas currently offers a one-year fixed deal at an average of £3,811 to those already on the provider’s standard variable tariff. But nothing for new joiners.
Eon offers its current customers a slightly cheaper deal, costing a typical household £3,407. But this is still 73 per cent more expensive than the current price cap.
New customers will pay even more, at an average of £4,300 a year. This is £2,329 more expensive than the existing price cap.
It is also £718 more than what the price cap is predicted to rise to in October.
Business development manager Natasha Watkins could not believe her eyes when Eon quoted her £11,500 for a one-year fix — which would have seen her monthly payments soar to £958.
Natasha, 43, who has recently retired from the RAF and lives near Swansea, was touted the deal last week shortly before she moved out of her four-bed semi-detached home.
She says: ‘I can’t imagine how the people who run these energy companies sleep at night when they are setting prices as high as that.’
Utility Warehouse offers the cheapest deal open to all households — at an average of £2,950 a year. This is still 50 per cent more than the existing price cap.
Customers who want this deal must also sign up to two other services offered, such as a mobile phone, broadband or insurance deal.
Some firms, such as Shell Energy, do not have any fixed rate tariffs on offer at all — even for those already with the supplier.
Experts also warn that fixed-rate tariffs often come with hefty exit fees if you wish to get out of your contract early.
Utility Warehouse charges a £25 dual-fuel exit fee — so £50 if you have both gas and electricity.
Meanwhile, leaving a 24-month fix with EDF Energy, priced at an average of £3,999 a year, would lump you with a bill of £200.
Scott Byrom, of comparison site TheEnergyShop, says: ‘Families should be wary of locking themselves in to a deal which comes with expensive exit fees.
‘Suppliers which set them will be aware that prices could fall over the next few years and you do not want to be forced to pay them to move to a cheaper tariff in the future.’ Meanwhile, customers with pre-payment energy meters — around 4.5million households — are not able to lock in to a fixed deal at all.
SHOULD YOU LOCK IN A RATE?
The next October price cap rise has not yet been confirmed by Ofgem. And as wholesale prices change all the time, bill hike predictions for further into the future are by no means guaranteed to happen.
This means that if you lock in to a deal — which suppliers have priced based on the expectation that energy prices will continue to soar — you could be stuck paying way above the going rate if they did later fall.
What’s more, customers will pay a higher rate for power sooner — and for longer — than if they stick on a price cap-protected deal.
Joe Malinowski, of TheEnergyShop, says he is not convinced the forecasts are justified, and does not recommend switching. ‘I would say, if anything, that the forecasts seem to be too high, firstly for October,’ he says.
‘It does not make any sense to pay more than the next price cap. Why pay January’s prices in August and go through the pain of high rates now?
‘In a rising energy market, because the cap is a lagging indicator, you’re always better off sticking with it because you are behind the curve in terms of the price.
‘It only makes sense to jump over from the price cap in to a fix when the market has switched over and prices are falling.’
If you lock in to a deal you could be stuck paying way above the going rate if they did later fall
Kevin Pratt, energy expert at Forbes Advisor, adds: ‘If the cap were to fall — unlikely, but possible — you might find yourself lumbered with an expensive deal.
‘Perhaps the key point is that this autumn’s energy bills, capped or otherwise, are simply going to be unaffordable for millions of households.
‘Moving from a variable rate tariff you can’t afford to a fixed rate tariff you can’t afford doesn’t improve anything.
‘That’s why the only hope for many is government intervention, perhaps in the form of a social tariff priced within the reach of those least able to pay the high prices coming down the track.’
However, it is still worth keeping a close eye on your account in case competitive deals do crop up.
Earlier this year, Eon customers were briefly offered relatively cheap one- and two-year fixed tariffs that were well worth grabbing — and there were no exit fees.
According to calculations by MoneySavingExpert based on Cornwall Insight’s predictions, the average household will spend 96 per cent more on bills next year than it does currently.
It suggests that if you are offered a year’s fix at less than 95 per cent above your current price-capped tariff, it might be worth considering.
> Guide: How to save money on energy and what you need to know about your bills
