Understanding Variable and Fixed Energy Tariffs

Variable and Fixed Energy Tariffs

In this week Whiteboard Friday, our Energy Expert Guy Thompson, puts on the geeky glasses and explains the differences between variable and fixed energy tariffs.

Video Transcript

“Hi there and Welcome to another Whiteboard Friday with MyUtilityGenius. Last week we went through a lot of different things you need to know and look at when picking up your energy tariff. What we thought we would do for you this week is a little bit of a surprise, a bit of a change up: we will start with a very simple explanation and for all of you who think that’s suffice you can then  do something else for the others stay with us and we will get into a funky geek mode.

So, starting with the easy bit, what we will be looking at is if we start with a variable price it basically means: the price that you see when you select your tariff could move up or down depending on the suppliers moving up or down their prices as a result of the wholesale market regulation… The fixed price on the other hand is absolutely set in stone for a period of time. But you can’t leave that fixed price early. If you do, you will be subject to termination fees. So that’s the consideration that you need to have.

So for those you that really works well, off you go, cup of coffee it is for you. For the rest of you that are a bit keen on Geek mode action here it is for you… Never let me say that we don’t treat you all. Here we go in geek mode we are. Now, try to describe how hedging works which is what this is, is in fact very difficult. What we decided in the end is: let’s pretend that this tank of water represents £1,500 worth of energy that you use on an annualised basis. That tank of energy exists in that sea of variability that the supplier has when he buys much more of electricity and gas. Now the interesting thing is that to fill up your tank, suppliers have bought electricity and gas over a period of time and that tend to sink to the bottom to use the analogy of water here. What it tends to append is that all this power and gas that was bought, flows out as you move through time. It is then substituted by new power and gas that the supplier is constantly topping up at the top end. What we then have is a lot of different numbers here representing the different purchases that the supplier has done. That purchases are constantly flowing out of the plug hole and constantly being filled up here. This is being filled up from the market, so that’s a market price. This here, well you don’t really know how much they pay for their bill at the bottom, how much is at the bottom and how much flows out. So there is a huge amount of intrigue and mystery to figure out what the numbers are here. But that’s what a variable tariff is and you can get in and out of that pool whenever you like.

We move over to a fixed deal, a fixed deal is very different. Here you have different types of water at different prices and here you have one load of water, a still bottle of water perhaps if you like; it’s all bought on the same day, you get your fixed price, that wont change. It’s not being topped up at all. When you get at the end of your deal, the whole thing disappears and you can choose to sit with an empty tank or get a new fixed deal or leap back to the variable pot.

Now why somebody would want to go to the variable route, main reason for that to be honest is that you don’t know how much is going out here and you don’t know what the price is for the stuff that is going out. All you do know is and that’s what everybody will point to, is what the market price is, what is coming here at the top. If we had an independent index or an independent benchmark of the energy price market that you could say: well my variable deal is indexed against X, you would always know how good or how bad or different it was. But we don’t have a Bank of England base rate equivalent of the energy market so effectively this whole thing is largely the function of a supplier coming up with a number and that probably explains why they all magically tend to change their prices at the same time. With this fixed price deal you have the certainty at least of how much you are going to spend, but if the market price drops off you are still going to pay the same price so there are some considerations there.

So hopefully that gives you a bit more of a feel on how variable and fixed tariffs work. Next time, instead of looking at a tank with Nemo in it, we will look at Green energy tariffs, until then catch you later, bye!”

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