Is fixing dangerous if the PM is going to cut energy costs?
The Prime Minister is suggesting taking some of the green measures enforced on energy firms out of bills. If, and it’s a big if, all other things remain the same, that will mean energy bills are cut. Though don’t read that as me saying everyone will save money – these measures will likely need to be paid for another way, such as through general taxation.
While this looks to be a policy made on the hoof, as it’s one from the incumbent government, it needs serious consideration as to whether it should impact current switching decisions.
Most specifically, how it impacts on those who are considering fixed direct debit tariffs (as cheap prepay fixes aren’t that cheap anyway), as by definition, locking in is a gamble on future prices.
Fixing is still the right thing to consider
For the last two weeks, we’ve been urging everyone to compare to see if a fix is good for them (see the MSE Cheap Energy Club Top Fixes Comparison). That’s because with energy prices rises popping up by the day, doing any other comparison is futile, you’ll just likely move to a company that’ll soon hike.
The only switch that works right now is one where you move to a fixed rate, so you get certainty it won’t just hike your price. (If I had my way, I’d legislate that whatever tariff you switch to, even variable tariffs, they can’t hike your price for the first six months.)
If comparing shows you can fix and save money, it’s a no-brainer – you cut your bills and get certainty they won’t rise. It’s a far trickier decision for those who’ll need to pay a premium over and above the post-hike prices to fix. Then it’s really far more about how much certainty matters to you than reading the markets.
Note: If you don’t understand fixing or need more help, read our Cheap Energy guide, which explains it in full.
What are the PM’s plans?
Currently, around 9% of energy bills – that’s Â£112 a year on a typical bill – is caused by green levies on energy firms. According to the Department of Energy and Climate Change, that’s due to rise to Â£190 by 2020 (though the percentage of a bill it makes up will be even larger, as they’ve factored in usage reductions).
This amount is made up of lots of smaller measures, from ensuring energy firms fork out to insulate houses for those on low incomes, to green energy generation. It’s being reported the Prime Minister won’t be able to cancel all of them, as some are enforced by EU legislation.
What would be the actual impact on energy bills?
Without any political change, it’s predicted that energy prices will rise 30%-40% over the next five years. This is due to changes to energy generation and efficiency measures, plus increases in wholesale prices. Though of course, in the short term, there’s always a chance of small falls (say 1-5%) if the wholesale price drops.
Now let’s incorporate the PM’s plans into this. There’s a lot of conjecture about how much of the green energy levy he can actually cut. I’m not sure anyone (including the Government) truly knows yet.
So let’s make a back-of-the-envelope guess at a half, to three-quarters of it – or roughly 6% off an energy bill. That means had this been in place now, we’d still be having energy hikes, just smaller ones.
What does all this mean for fixing now?
This is all currently a wing and a prayer, a reactive policy indicated at Prime Minister’s Questions â so we’re a long way from understanding what they really want to do. So it’s something to factor in, but not base too much of your judgement on.
The biggest change for me is while I was already biased towards those who could fix cheaply finding a tariff with no exit penalties â now I’m even more strongly suggesting if you’re going to lock in, do it with no exit penalties so you’ve a way to escape at no cost.
That means if prices did drop, you’ve saved, and you can shift if you’re no longer saving.
Again, to find a no exit penalty fix and see if you can save, use our Cheap Energy Club Top Fixes Comparison.
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