The big gamble around changing your energy deal right now

The OVO Energy app on a mobile phone is held against a laptop screen displaying details of a one-year fixed rate OVO Energy tariff for customers as the supplier has offered its first deal below the Government's £2,500 cap on typical household bills amid falling wholesale gas prices. The energy giant is offering a one-year fixed tariff of £2,275 to existing customers - undercutting the Government's energy price guarantee (EPG). Picture date: Sunday March 26, 2023.
OVO Energy is offering a one-year fixed tariff of £2,275 to existing customers - undercutting the government's energy price guarantee. (Getty Images)

What's happening? UK households are soon expected to finally feel the benefits of falling wholesale energy prices after months of sky-high bills.

Vladimir Putin's war in Ukraine and economic aftershocks of the COVID pandemic generated a global energy crisis last year which forced the government to intervene to stop household bills becoming too high.

It introduced an Energy Price Guarantee (EPG) – capping the energy bill of an average household at £2,500 – which was extended until the end of June in chancellor Jeremy Hunt’s latest budget.

Wholesale energy prices have been falling for months, and two providers - OVO Energy and SSE - have been offering deals which are actually lower than the EPG since March.

They are offering a tariff that would work out to about £2,275 for an average household on a 12-month contract – in an attempt to incentivise people to make the switch.

However, further shifts in the market and changes to the price guarantee means switching now could be a gamble, as Yahoo News explains.

How do energy companies set their prices?

Sun setting behind a row of electricity pylons
All energy providers have to buy their electricity wholesale from the National Grid, which explains why even renewable energy bills have shot up. (Getty Images)

Your energy bill is calculated based on a handful of factors, but wholesale prices take up the biggest chunk, which explains last year's massive surge.

According to British Gas, this makes up around 70% of the default tariff price cap for a dual-fuel, direct debit customer with typical consumption.

In addition to that, there are network costs - set by the distribution network in your region to cover maintenance of the pipes and wires that provide gas and electricity to your home.

There are also day-to-day operating costs, policy costs (resulting from energy related obligations set by the government), VAT and other direct costs to consider.

Why are bills only coming down now?

While wholesale prices have been falling for some time, it was always going to take some time before consumers started noticing the difference, as Alex Staker from price comparison site Bionic explains.

"To be able to offer fixed rates, energy suppliers need to buy power in advance of selling it to customers. This means the rates at which they have bought wholesale energy to sell today might differ from the current wholesale rates. Suppliers also need to factor risk into their price calculations," he said.

"Energy suppliers are continuously buying energy to make sure there's enough to cover demand. If demand exceeds supply then they need to buy more at current market prices to cover the shortfall. But if supply exceeds demand, then suppliers need to sell the excess energy back to the grid - if the day-ahead price is lower than the price they bought the energy for, then they'll lose money.

"When the market is so volatile, the risk to suppliers is greater and so prices go up. And this is also part of the reason why it can take time and a consistent run of lower rates for any price drops to be passed on to customers."

Should I switch right now?

Close Up Of Woman Holding Smart Energy Meter In Kitchen Measuring Energy Efficiency
Energy prices are not an exact science, so the timing of your switch is always a bit of a gamble. (Getty Images)

While the Energy Price Guarantee is to remain in place until July, OVO Energy and SSE are already undercutting the price cap - offering a 12-month contract that would work out to about £2,275 for an average household.

While it may be tempting to do so right away, Future Energy Associates say it could be worth holding off if energy prices drop further in July. The energy analysts say people who signed up to OVO or SSE in March could miss out on annual savings of £212 or £197, respectively.

However Ovo, which owns SSE, said that Future Energy Associates’ calculations “underestimate forecast supplier costs and the future level of the price cap, and therefore significantly misrepresent the value offered by our fixed tariff”.

Cornwall Insight has forecast that the average energy bill could fall to £2,062 between July and September, rising slightly to £2,098 for October to December, and then again to £2,162 for January to March.

However, this is not an exact science, with the energy analysts adding: "The market is finely balanced and susceptible to price shocks arising from any unforeseen circumstances."

How to switch

If you think you could be getting a better deal elsewhere, you can try using a price comparison website, which show you a range of tariffs in order of price.

However, these sites don't show you every single available tariff on the market, and you may be able to get a cheaper deal directly from your supplier.

You can also try an auto-switching service such as Switchd, which monitor energy prices and move you onto the cheapest tariff they can find without you having to do anything.

Alternatively, you can contact your energy provider directly. In February 2022 energy regulator Ofgem changed the rules so that any lower prices aimed at attracting new customers must also be made available to old customers - so it's always worth checking if you're due a reduction.