Wholesale energy prices are DROPPING. Was/ is fixing wrong?

Wholesale energy prices are DROPPING was/ is fixing wrong?

Four of the big six energy companies have announced price hikes to hit in the next two months, two more are expected to follow, yet the wholesale prices energy companies pay are dropping (see Wholesale rates at year low) – so is it worth locking in now if our prices may fall again?

When wholesale prices are rising, energy companies respond quickly and put their prices up. It’s often said that when wholesale prices are falling, energy companies never respond and put their prices down – yet that isn’t true (though whether they do it with such speed and relish is debatable). As this uSwitch chart below shows, prices have and can move in both directions.

British Gas average annual household bills

So, the concept of energy bills dropping after rising should certainly not be discounted. However, over most two year periods – about the time most fixes last – they’re almost always rising. And there is no doubt that over the long run (5-25 years) the infrastructure requirements being put on energy companies means prices will rise.

Yet, in the short run the markets rule, therefore prices can vary radically, so right now the key info is…

Though it’s far from being likely now, if the worldwide economy moves into a double dip recession, which some say the current market turmoil predicts, then demand for oil is likely to drop, and the likelihood of wholesale prices falling rapidly increases."

Is it worth fixing if prices may drop?

For six months we’ve been saying everyone should urgently CONSIDER fixing, and the same holds true now. The key here is we’re saying check whether fixing is right for you – not a blanket – everyone should fix.

Much of this info is already in the fixing FAQ part of the cheap energy guide but I wanted to spell it out in the light of the current wholesale price falls.

• Fixing should be seen as an insurance policy

  If you are worried about price hikes, urgently consider locking into a fixed tariff, which guarantees rates for a set time such as 18 months to effectively insure against your prices rising.

• To decide if it’s worth it, first see how much you’ll pay

  To find out whether it’s right for you – you first need to know how it compares to what you’re currently paying (see compare energy tariffs for a full list on how to do it).

• Many can fix and save £150/year over their PRE-hike prices.

  If like millions you’re on an energy company’s STANDARD tariff, you may be able to fix and cut your bills by £150 a year. Now to clarify, that’s £150 a year over the pre-hike prices, so it could easily be a £300+ saving compared to the post hike prices.

  In this case, even if energy companies were later to cut their prices back down you’d still likely have saved substantially – so even if they did cut prices – to think you would’ve been better on your old tariff is unthinkable.

• If you don’t get a cheap fix this could all be baloney.

  I’m always slightly frustrated that while my suggestion is to ‘compare to find your cheapest fix’, I meet people who say: "Thanks for your help I called my energy company to fix". It makes me want to groan.

  That isn’t the point – it’s not about locking in at all costs, it’s about locking in on the cheapest fix. If you have locked in without doing a comparison, there is a chance you’re paying a premium even over future rates to fix, which isn’t sensible.

• What if the comparison shows it costs MORE to fix?

  This changes the landscape. If you’re already on a super-cheap discount tariff and need to pay more to fix then it’s nowhere near as certain. Although do factor in the definite British Gas, SSE and Eon price rises hitting in the next month and predicted rises for Npower and EDF.

  Those increases are around 10%-20%. So if you’ll pay more than that on a fix, it’s likely to be best to stay put, unless there might be yet another round of hikes quite soon after this one.

  If the gap’s less, balance savings now against price certainty – factoring in the definite future rises, but also the chance that after that prices could rise further OR fall back again. Here there is less certainty of a saving so it is far more about your attitude.

• Fixing isn’t about ‘it will be the cheapest option’, it’s about ‘it will be a definite price’.

  The concept of fixing is not primarily about trying to beat the markets and win overall. For most, it is about peace of mind of knowing your bills CAN’T rise. You need to balance out the worst case and best case scenarios.

  Of course it’s possible in the future you’ll look back with hindsight and prices will have dropped after the rise, and you may have been able to beat the cheapest fix with a super-cheap online tariff (though as I explain below, in that case just ditch your fix).Yet this risk must be balanced against prices not falling, or even rising again and you having missed out on the chance to freeze prices at the current level.

  For most people running tight family budgets it’s better to ensure there’s no risk of hikes, paying at a level you can afford, than to play the market in the hope of gains if prices drop.

• If energy prices crash, the only risk is the exit penalty.

  Let’s take the most extreme scenario that could work against fixing; that after this round of 20% ish price hikes, energy prices then fall by 50% – so you’ve locked in at a rate that’s too high.

  Actually all that happens here is you pay the exit penalty of around £30 to £50 per fuel to leave – an amount that should at the minimum be covered for most people by the savings in the short term due to the initial price hike.

  In a way fixing is balanced in the consumers favour (provided you get a good price). Your lock-in is absolute, the energy companies can’t ditch you from it if things go against it, but if it’s wrong for you – you just pay a fee to leave.

• The last time prices rose then fell – people who fixed were still the winners.

  In early 2008, wholesale energy prices began jumping just like now, cheap fixes were being pulled just like now, so we were again then suggesting people consider capping.

  Then British Gas set a trend followed by others, announcing its biggest price rise EVER: gas UP 35%, electricity UP 9%. Further rises were expected the following January, yet the recession roller-coaster actually meant rates were then cut by 10%, although this still left most prices higher than when people capped.

  This meant everyone who capped or fixed their bills got peace of mind and according to a comparison industry report in February 2009: "Households that took out a fixed rate plan in July 2008 are currently paying £143 a year less on average than households on standard plans" – so even after that scenario people had still gained – though of course this can’t be used as a prediction.

So in summary, if you want peace of mind, then getting a cheap fix is still absolutely the right thing to do. 

There is however a slim chance that in hindsight it won’t end up having been the very best deal for you – so you need to balance the risk that you’d have to pay exit penalties to leave, against the guaranteed protection from any hikes. (For what to do if you don’t want to fix, but still want to save money, see the Cheap gas & electricity guide.)