Energy price cap: why you should fix your tariff now for as long as three years

Households should fix energy prices now, after draft legislation for the Government's energy price cap was revealed, which experts say will lead to price hikes for many customers.

The Department for Business, Energy and Industrial Strategy published details of the cap this morning, saying it will be a "temporary measure" until 2020.

The initiative, which promises to protect 5 million families from rip-off tariffs, will be kept under review and on the advice of Ofgem, the regulator, could be extended until the end of 2023 at the latest.

The price cap is not expected to come into force until the end of next winter and we still don't know what level prices will be capped at.

Mark Todd, founder of energyhelpline, the energy switching site, suggested it could be as much as £1,160 for your total energy bill a year. In a best case scenario the cap could still be £1,066, he said.

The cap has been heavily criticised by energy experts who say that while it will reduce the cost of the most expensive tariffs it could actually raise the bills of households on the cheaper deals.

We saw evidence of this in May when the average cost of the Big Six energy firms' cheapest tariffs increased by almost 20pc - compared to their standard tariffs that have gone up by 7.2pc - seven months after the price cap was first suggested. 

So is it worth locking into a long-term fixed-rate tariff to protect yourself against future rises?

If you want to save the most money, Mr Todd suggested opting for the cheapest one-year fix each and switching each year.

The best deal is currently from Iresa and costs £820 for the average customer per year. The average "medium user" is classed as 3,100kWh electricity and 12,500kWh gas.

However, those who "don't want the hassle" of switching regularly could opt for the lowest longer term fixes offered by smaller suppliers and still make savings. This will also offer insurance against price rises.

However, beware the hefty early exit penalties.

The cheapest two-year fix from ENGIE costs £905 a year. The deal ends in September 2019.

Those who want a longer fix could consider the 23-month tariff from iSupplyEnergy, which costs £917 a year for the average customer, or Flow Energy's 24-month tariff for £942 a year. Both come with early exit fees of £60 for both fuels.

Those who lock into SEE's Fix 2020 for the next 36 months will pay £1,111 a year on average, while First Utility's First Fixed September 2020 costs £1,067 a year.

The longest fix we've seen is from nPower, which is 41 months.

The average "medium user" who fixed on nPower's "Super Fix March 2021 v2" tariff would spend £1,116 a year, according to quotes from uSwitch, the energy comparison site.

At the moment the average standard tariff from the big six suppliers costs £1,135 a year, for customers who pay by direct debit, so the 41-month fix doesn't cost much less. However, it does protect you against price rises for the next three or so years.

The fixed-deal also comes with exit fees of £50 per fuel if you want to leave within the term.

Rising energy prices

Mr Todd said consumers should consider a fixed tariff as wholesale energy prices have begun to rise again, hitting household bills, after falling in the summer. 

Mr Todd said "two times out of three" annual energy prices will rise and while nobody can predict the percentage increase, he suggested 5pc a year was a reasonable expectation. 

He said a fixed tariff is sensible but consumers on average should be spending no more than £950 a year on their energy bills.

"The 41-month tariff from nPower is expensive and consumers should only opt for it if they really can't be bothered to switch," he said.

It's best to act swiftly before prices inevitably rise.

Sam Dumitriu, research economist at the Adam Smith Institute, the think tank said: "The evidence is clear: when price caps are imposed customers stop switching, the best discounts are withdrawn and prices bunch around the cap.

"Customers may become complacent, leading to fewer bill payers accessing deep discounts by switching suppliers."

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