Personal Finance

Should you switch energy suppliers now ahead of the October price cap rise?

We look at Martin Lewis's recommendation for some people to switch to a fixed tariff now. It's not for everyone, but could it work for you?

With energy prices higher than we've seen in decades and prices predicted to rise again when the price cap is reviewed in October, many of our readers are wondering what to do—keep your current plan or switch to a new fixed plan?

We have a look at Martin Lewis's thesis that now could be a good time to lock in a fixed rate from your current energy supplier, if they offer you one, and the math behind it.

Thesis: Some People Might Benefit From Switching to a Fixed-Price Tariff Now

As recently explained by Martin Lewis, since the price cap may rise even more than previously thought, some seemingly costly fixed-price offers look like they might now be good deals now—for some people.

This may seem confusing, since currently there are no tariffs on the market that are meaningfully cheaper than the current price cap of 7.37p/kWh for gas and 28.34p/kWh for electricity (£1,971/year estimate for typical duel-fuel use).

So...

Why would I switch to a fixed tariff now?

You might want to switch to a fixed tariff if you believe that prices will still rise from here—and if you can find a tariff that is notably cheaper than the expected October price cap. The argument is that while you might pay more than the current price cap until October, from then on you might end up paying less than future price caps.

The October price cap will be announced on 26 August 2022 and runs from 1 October 2022 to 31 December 2022 (note, this is a shorter 3-month period! The price cap used to be valid for 6 months, but they've just changed it to 3 months).

No one knows yet what the new October price cap will be. But according to Martin, the best predictor of prices is Cornwall Insight, which is predicting £2,980/year on typical use. This is slightly higher than the £2,800/year mentioned by Ofgem in May. It Ofgem is right, this is a 42% rise from the current cap. If Cornwall Insight is correct, that's closer to 51%. And that just covers the three months between 1 October and 31 December; the prediction is for a further rise after that as well.

There's also no way of knowing how Ofgem will choose to split the increase between electric and gas unit charges and standing charges. To give a rough idea, if the 42% figure is correct and it applies to both the gas and electricity unit charges, we'll be looking at unit charges of 10.5p/kWh for gas and 40.3p/kWh for electricity come October. But these could be higher or lower, depending on the % rise and how Ofgem allocates across unit and standing charges.

What is a good price on a fixed tariff?

Back to Martin's recommendation... he looked at the expected future price caps using Cornwall Insight figures and estimated that the typical person will pay 41% more for energy in the coming year than they do now. (Note, the 'coming year' includes 3 months at the current price cap, then uses estimates after that.)

His conclusion is that:

"If you're offered a year's fix at no more than 40% above your current price-capped tariff, or 45% more if you very strongly value budgeting certainty, it's worth considering."

Where does he get these figures? We tried to replicate the math. First, we dug into consumption figures because we know they're higher in winter months. If consumption was evenly distributed across the year, you'd consume 25% of the annual consumption per quarter. But we consume more in the dark, cold months. So we checked energy consumption figures from gov.uk and estimate that 31% of the typical annual usage occurs in the first quarter of the year (Jan - March), 21% in Q2, 20% in Q3 and 28% in Q 4.

From there, we used the Cornwall Insight estimates for future price caps from Martin's site to calculate quarterly energy bills.

Here's how we tried to replicate his results using these assumptions, and the estimates from Cornwall Insight.

# MonthsDual-fuel direct-debit pay capEstimate of % of annual consumption per quarter (assumes higher consumption in winter months)Estimated quarterly energy bill
Now - 30 September (approx 90 days)3£1,97120%£394.20
1 October 2022 - 31 December 20223£2,980^28%£834.40
1 January 2023 - 31 March 20223£3,000^31%£930.00
1 April 2023 - 30 June 20223£2,760^21%£579.60
Total annual bill£2,738.20
Increase over today's price cap39%

^ estimated from Cornwall Insight, according to MSE.

As you can see, this shows that the typical family will spend 39% more on energy in the coming year than they do right now under the current price cap.

So, our math supports Martin's analysis, that it's worth considering a fixed tariff if it's no more than 40% - 45% more than your current price-capped tariff.

These are ballpark estimates, however, as there are many unknown factors that could affect these calculations.

Note: The 'price cap' can be misleading. It doesn't mean there's a cap on the actual £ cost of your bill—it's a cap on the amount an energy company can charge on each unit of gas and electricity you use (i.e. as of April 2022, the cap is 7.37p/kWh for gas and 28.34p/kWh for electricity). Those that use more energy than 'typical' will pay more than the £1,971/year average duel-fuel estimate for a typical household paying by direct debit.

Erin Yurday

Erin Yurday is the CEO, Co-founder and Editor of NimbleFins. Prior to NimbleFins, she worked as an investment professional and as the finance expert in Stanford University's Graduate School of Business case writing team. Read more on LinkedIn.

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