On Friday, the independent energy regulator, Ofgem, will announce its new energy price cap. The cap is expected to increase by an extortionate amount, hiking energy costs for millions of households just as the weather is likely to turn.
Importantly, the energy price cap only applies to those on variable deals. Fixed customers are not directly impacted by the price cap. Despite this, finding a fixed tariff to avoid soaring costs is far from a no-brainer. In this article, we'll explore the risks of fixing your energy deal.
How does the energy price cap work?
The current energy price cap limits the cost suppliers can charge per unit of energy. Under the current cap, a typical household is charged £1,971 a year. However, it's expected the new cap will lead to typical households facing eye watering bills of £3,576 a year.
The energy price cap is currently reviewed four times per year. While the new cap will be announced on Friday 26 August, it won't impact bills until 1 October.
The energy price cap only directly impacts the bills of those on variable tariffs. For those with a fixed energy deal, the price cap doesn't have a direct impact as the cost per unit of energy is 'fixed' for customers with this type of tariff.
How high will energy costs go?
Sadly, the cost of energy doesn't look to be getting cheaper any time soon. That's because there are fears the cap will increase further when the price cap is reviewed early next year. Energy consultants Auxilione, have even suggested a typical figure of £6,089 by April 2023.
The Government has, thankfully, recognised that rising energy bills is a huge issue. It is for this reason why the Government has announced a range of energy bills support measures, including £400 for every household from October onwards. This will be split into six separate payments.
Yet, due to the sheer size of expected price rises, many have suggested the current support announced simply isn't enough. As a result, tackling the issue of soaring energy costs will undoubtedly be priority number 1 for Rishi Sunak or Liz Truss once in office.
Is it a good idea to go for a fixed energy deal?
Earlier this Summer Money Saving guru, Martin Lewis, suggested that households fearing continued energy price hikes in future should explore the possibility of signing up for a fixed deal. We also crunched the numbers to take a closer look at his suggestion.
The recommendation to consider fixing was mostly aimed at those who welcomed the thought of paying a fixed cost per unit of energy regardless of future rises. It was also aimed at those who simply couldn't afford to pay their energy bills if prices got any higher in future.
It's worth knowing that, in June, all of the fixed deals available were understandably higher than the current price cap. In hindsight, however, anyone who did opt for a fixed deal in June probably made a shrewd move. This is simply because we now know energy costs are now set to continue heading upwards. For millions on variable deals right now, the upcoming winter looks very bleak indeed.
While fixed deals are still available, most are now far, far more expensive than they were at the beginning of Summer. As a result, if you do fix now, you're essentially banking on the fact that energy costs will continue to skyrocket. This is certainly a possibility, but it's a real gamble.
What are the risks with opting for a fixed energy deal?
The most obvious risk of opting for a fixed energy deal is the fact that wholesale energy costs may tumble during your fixed term. If this happens and the energy price cap drops, you'll be paying a far higher cost per unit of energy than those on variable deals. While you may be able to terminate your fixed term early, you'll be faced with a hefty early exit fee. It's been suggested that energy exit fees are now toughly TEN TIMES higher than a year ago.
Yet aside from a fall in prices, fixing your energy deal comes with other risks too. Let's take a closer look at each of them.
Risk 1. You have to move home
If you're currently on a fixed tariff, it's likely you won't be able to transfer it to another home. So, if you move address, you may have to say goodbye to cheap(ish) energy.
Risk 2. The bill payer's name changes
Some energy suppliers simply won't honour a fixed deal if you change the name of the person on the bill. This may apply if you suffer a family bereavement for example. Or perhaps, if an individual responsible for paying energy bills in a shared property decides to move out.
Risk 3. You get moved to a prepay meter
If you're unable to keep up with your energy bills, then your supplier may have the right to move you onto a prepay meter if you don't agree to a repayment plan. This is so you'd be forced to pay for any energy in advance (which limits the risk of your supplier losing out). If this does happen to you, you'd lose any fixed deal you previously had.
Risk 4. Your energy firm goes bust
Last year, a staggering 28 energy firms went bust due to rising wholesale costs and the low energy price cap imposed by Ofgem.
While the rate of energy suppliers going bust has slowed, it's still a risk. While you won't lose your energy supply if your supplier goes under, it's very likely you'd lose access to any cheap fixed deal you were on. When an energy company goes bust, customers are typically moved to a new supplier. Any new supplier is almost certain to charge the price-capped rate.
Looking to learn more about the cost of energy? Take a look at our analysis that looks at the average cost of energy in the UK.