Energy price cuts – was it wrong to fix?

Energy price cuts - were you wrong to fix?

Energy price cuts - were you wrong to fix?

Updated 17 January after all companies have cut…

The last week’s very modest cut in energy prices have led some to question whether they were wrong to lock into a cheap fixed rate tariff to guard against future rises.

Yet these cuts need to be put in perpective. The typical bill for a standard tariff before cuts was £1,350, after it’s only dropped to £1,320 – this is very far from reversing the mammoth price hikes last year – and hundreds of pounds more expensive than the cheapest fixes that have been around for the last six months. So most who fixed should be sitting pretty.

So let’s go through it.

Fixing is about surety, not just about prices

Even before looking at the rates, which show substantial savings from fixing for many, it’s worth remembering that a fix is an insurance policy against price rises. It’s a peace of mind decision.

We always state that whether it’s right for you is about your attitude to risk, rather than guessing games. Fixing is primarily for those who cannot risk prices rising.

So it should be considered that even if prices drop substantially, which they haven’t, if you fixed for the right reasons (see my blog explaing how to decide whether to from last August: Is it worth fixing, if prices fall?) the risk of paying a little more is worth it against the damage of facing an unaffordable price hike.

It’s a bit like travel insurance, you buy it for protection, but you’re not annoyed with yourself if you don’t get ill on holiday. You bought it just in case, for peace of mind. So it’s done its job.

I must admit to being slightly surprised having seen news stories of people complaining that they fixed and now their price won’t drop.

Yet that’s the point of a fix. Your price didn’t rise during the huge hikes either.

Prices are still massively up

All the big six energy companies have cut EITHER gas OR electricity, none have cut both and only by about 5%. These are small cuts when you consider back in late summer and autumn energy firms raised BOTH gas and electricity prices by up to 19%.

The table below shows the real rise households are still facing overall

Price change since autumn 2011
Provider Average hikes in late 2011 2012 cuts Overall hike compared to summer 2011
Gas Electricity Gas Electricity Gas Electricity
British Gas 18% 16% 0% 5% 18% 10.2%
EDF 15.4% 4.5% 5% 0% 9.6% 4.5%
Eon 18.1% 11.4% 0% 6% 18.1% 4.7%
Npower 15.7% 7.2% 5% 0% 9.9% 7.2%
Scottish Power 19% 10% 5% 0% 13% 10%
SSE 18% 11% 3.8% 0% 13.5% 11%

If you got a cheap fix, prices would need to drop hugely to make it the worse option

The chart above shows the difference in typical prices from the three major suppliers to have cut prices compared to pre-hike costs last summer.

Provided you got a cheap fix the right way, by doing a comparison to find the right one, prices would need to seriously dive to make fixing on the cheap more expensive than a variable tariff bought last summer as prices are still much higher, even after this round of cuts.

To show the impact of this – take a trip back in time to last July’s weekly email after British Gas’d announced a rise

Energy Fixes, July 2011

It’s worth just looking at the table.

The cheapest fix then was £1,000/year for a typical home, the cheapest variable about £940/year. After the round of price cuts standard tariffs will be around £1,320 and the cheapest variable rate £1,030. In other words the cheapest fix then was cheaper than the lowest online variable rates you can get right now.

You’ve been saving a while with a cheap fix

The previous round of price hikes have been in place for up to five months, so anyone who took a cheap fix before that round has been saving big time over the past few months.

Not only that, but with the exception of British Gas, whose price cuts thankfully have immediate effect, the others haven’t hit yet. EDF is February, SSE bizarrely is late March. So there’s no gain over the expensive winter months.

What’s more, if you took a cheap fix when we first highlighted the option before the price hikes hit, many would have saved £150 over the pre-hike prices, which then jumped by 10-20%.

And given this week’s cuts shave about £20 or £30 off an annual energy bill, many will still have saved.

Even if you fixed since last autumn’s price rises, provided you were moving to the cheapest deals, unless in the rare circumstance you chose to move to a fix that cost more than you paid at the time (or your comparison showed fixing saved you £30 or less) you’re still better off compared to the post cut prices.

Of course if you choose to compare this not with what you were paying but to the very, very cheapest online deals that you could’ve moved to, which undercut the cheapest fixes, you may’ve had lower bills (the easy way to find out is do a quick comparison and see if its possible to save). Yet that is the cost of choosing the guarantee you still have that your rate won’t rise.

What will happen to prices, should you fix now?

For many on standard tariffs it is still possible to make substantial savings and lock-in to a fixed rate.

The decision to fix should be based on three factors:

What is happening to prices: Currently, they’re creeping down, but wholesale prices are down further so there is room for more cuts. Yet that’s far from guaranteed, energy is a market and moves rapidly, so prices could still rise. So there’s no surety.

– Can I afford price rises? This is still by far the most important question. If you cannot afford the risk of prices going up – perhaps as then you’d simply not be able to make ends meet then protecting yourself from that is more important than guaranteeing you gain from any future price drops. This is all about your attitude.

– How cheap are fixes? Last summer, there were some uber-cheap deals around, undercutting even the cheapest variable rates. That isn’t quite the case now though those on standard tariffs can still save £100s by switching and fixing (see the Cheapest energy deals guide).