Energy tariffs explained

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Whether it’s powering your tech, cooking your dinner or heating your home, the energy tariff you are on for your gas and electricity will affect how much you pay.

It follows then, that knowing your way around energy tariffs will enable you to save money by switching to the best deal.

What is an energy tariff?

An energy tariff is the plan that determines how you pay for your gas and electricity – and how much. It’s made up of two components – a standing charge, which is a flat daily rate that is charged on most tariffs, plus a charge for the energy you use. This is expressed as a price per kilowatt hours, commonly shortened to kWh and often referred to as the unit rate.

With gas and electricity powering a variety of different appliances around the home, it's not easy to know how quickly you'll burn though 1kWh. However, some rough estimates of what it takes to use this amount include making a cup of tea 10 times; doing one load of washing in your machine; or baking some banana bread in an electric oven.

Although a household’s energy usage can vary enormously, a typical home uses between 8,000 and 17,000 kWh of gas and between 1,800 and 7,100 kWh of electricity a year according to the UK's energy regulator, Ofgem.

How are energy tariffs priced?

A variety of different factors are taken into consideration when determining how an energy tariff is priced.

The main one is the price your supplier pays for energy, also known as the wholesale cost. This fluctuates in line with supply and demand but it's not uncommon for suppliers to buy energy up to three years in advance. This cushions them – and you – from any wild fluctuations and helps them set their prices.

Network and operating costs are another significant part of the overall cost, with suppliers charged to use the infrastructure of pipes and wires that run around the country. Energy suppliers factor in other expenses such as contributing to government energy programmes as well as taking into account how competitive they want to be.

On top of all that, where you live will also affect how much a supplier charges you. This could be down to the charges levied by the local distribution networks; how far the energy has to travel; how many customers the supplier has in the area; and even how much energy these other customers use.

What are the main energy tariffs?

There are hundreds of different tariffs available from the energy suppliers, but the two main types are standard variable tariffs and fixed rate tariffs.

The standard tariff is the default tariff charged by a supplier. You might find yourself on it if you move or you don't arrange a new deal when a fixed tariff expires.

How much you pay on a standard tariff will depend on the supplier's unit rate, which will vary and can go down as well as up. It can work well if you don't want to be tied into a deal but it's generally not the cheapest way to buy your gas and electricity.

With a fixed tariff, the unit and daily rate is set for a specified length of time, which is typically anything from 12 months to three years. Although your bills will vary in line with the amount of energy you use, you have the certainty that if energy costs increase, you won't see a hike in the rates as a result of this.

Fixing your tariff for a set period is usually cheaper than going for a standard variable one but you could get caught out if energy prices fall. The other potential catch with a fixed tariff is that most suppliers charge an exit penalty if you do decide to switch energy tariffs before the end of the set period.

These cancellation or early termination fees can be £60 plus if you have both gas and electricity but, under Ofgem rules, you can't be charged if you're in the last 49 days of a fixed tariff contract.

What other tariffs are available?

While standard variable and fixed rate are the main tariffs to look for, you'll also come across other tariffs such as dual fuel and green energy. These offer something extra, as explained below, but will be either a standard or a fixed rate so make sure you're picking the tariff you want.

  • Dual fuel tariff – by picking one company to supply both your gas and electricity, you may be able to get a cheaper deal. Having one supplier is also more convenient but, if saving money is your primary goal, do shop around first as you may get better deals by having different gas and electricity providers.

  • Online energy tariff – if you're comfortable managing your energy account online, with bills and any other correspondence sent by email, you may be able to save money with an online energy tariff.

  • Green energy tariff – although you'll get exactly the same energy as your less environmentally conscious neighbours, a green energy tariff gives you the comfort that you're doing your bit for the planet. Switch to this tariff and your supplier will make purchases of renewable energy to match your energy usage. There are some potential catches, though. While the cost gap is narrowing, green tariffs tend to cost more. In addition, it's important to check the details as there are a variety of different shades of green on offer: while some tariffs offer 100% renewable matching, others are set at a lower percentage.

How do I find the best energy tariff?

There are hundreds of tariffs to pick from but with factors such as your location and energy usage determining which one represents the best value, it's sensible to use a comparison service.

This analyses your energy usage and recommends a variety of tariffs from more than 50 different suppliers. Its analysis also shows how much you could potentially save, with some users already benefiting from annual savings of as much as £497 on their energy bills.

Once you’ve identified the best tariff, switching is simple with your new supplier arranging everything on your behalf. The process can take up to 21 days but, other than cheaper bills, you won’t notice any change to your energy supply.

Read More

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