Energy tariffs explained
Energy tariffs explained
Here’s our glossary of the main types of energy tariff and what each one offers. We hope it’ll come in handy while you’re comparing deals. Energy providers might give their tariffs different names, but most will fall into these categories.
What is an energy tariff?
An energy tariff is how an energy provider charges a customer for their gas and electricity use. The two main types of tariff are fixed rate and variable. A fixed rate tariff sets the cost of energy for a certain amount of time, typically one year or more, while prices on a variable tariff can go up or down according to the market.
Fixed rate tariffs
This type of tariff guarantees the price of your energy for a set period of time (usually 12 to 18 months). After this you're free to switch and save again, but if you leave early, you'll probably be charged an exit fee.
Fixed rates are helpful for keeping control of your budget, and the rates you'll pay will probably be lower than those of the standard tariff. But remember what is fixed is the cost of each unit of power you use. If you start using more power than usual, your bills will go up but all the extra power used will be charged at the fixed rate. Fixed rate tariffs are designed to protect you from energy price rises.
When your fixed rate tariff ends you will need to find another fixed rate tariff or your provider will switch you over to a variable rate.
Prices on this type of tariff can go up or down according to the market. Variable tariffs can be cheap, but they do go up and down. This can be advantageous when energy prices are going down but you will pay more when they rise, so if you need to be sure of how much you will be paying for your energy, then you might prefer a fixed rate tariff.
Suppliers will also have a Standard Variable Tariff as their default pricing plan. If you had a contract with your supplier that came to an end, they’ll probably have rolled you onto this tariff. There won’t usually be any exit or cancellation fees on a standard tariff, and you should be free to leave at any point.
And government research has shown consistently over time that Standard Variable Tariffs are more expensive than fixed ones, with differences of 10% or more in recent years.
The cost of your energy per unit (KwH) is capped at a certain point – and it won’t go over this agreed amount. Prices can be capped in two different ways:
- Capped prices per KwH – where the maximum price is set per unit of power consumed. Example: you will not pay more than £x per KwH
- Capped prices in comparison to another price – where the maximum difference between one tariff compared another one is fixed in advance, for example: the tariff A capped rate will be no more than X% over tariff B
Prices can go down as well as up, but the rates or price won’t exceed the agreed limit. But remember, it doesn't cap the total cost of your payments at the end of the month, because this depends on how much gas or electricity you use.
This type of tariff might be for you if you like a certain amount of stability, but still want to benefit if energy costs go down in the market.
However, it probably won’t be the cheapest tariff and you may be charged a cancellation fee if you leave before the contract end date.
Unlimited energy tariffs
This tariff gives you unlimited energy use for a whole year at a cost you know when you sign up. It is a recent introduction, with very few suppliers offering it, but more suppliers are considering creating similar deals if they see a potential demand.
The supplier will need to know how much gas and electricity you typically use based on your old bills to work out how much you should be charged overall. Once they have worked that out the cost will be fixed for the whole year whether you use more or less power than in previous years that the tariff was fixed around.
For people on a fixed budget it can be a good idea as you know what your outgoings will be regardless of energy usage. But you could end up being charged more if during the year you end up using less power than expected. Situations where this might happen would be if you
- upgrade to a more efficient boiler
- have fewer people in the home, for example children going off to university
- improve the insulation of your home or immersion heater if you have one
Dual fuel tariff
With a dual fuel tariff you get both your gas and electricity from one supplier, which can make life a bit simpler. Suppliers may also give you a discount in order to get double your custom.
It’s worth checking what deals you could get if you signed up for gas and electricity separately – those savings might outweigh any discount you’re offered for both.
Read more in our guide to dual fuel.
This is the energy equivalent of a pay-as-you-go phone. You’ll need to have a pre-payment meter to use it. As the name suggests, you pay for the energy before you use it by topping up the meter online, with a key, card or tokens.
It’s usually the most expensive way to pay for your energy but it does give you total control over what you’re using and spending.
Feed-in tariff (FIT)
Unlike the others on this list, this type of tariff applies to what you get paid by energy companies, rather than vice-versa. It’s only applicable if you generate your own power, e.g. through solar panels.
Online or paperless tariff
With an online tariff you’ll manage your account online only, with no paper bills or letters. Online tariffs tend to be cheap, as they save the supplier money on postage and paper. They’re also more eco-friendly.
But if you like to file your paper bills away each month, this may not suit you. It’s also worth noting that most online tariffs don’t have customer call centres, so you won’t be able to speak to someone if you have an issue.
Green, ‘eco’ or renewable tariffs can work in a number of ways. One option is that whatever amount of energy you use will be ‘given back’ by your supplier to the National Grid in renewable energy. Alternatively, they may supply your home with 100% renewable energy, a mix of renewable and non-renewable or they may contribute to environmental projects instead.
Green tariffs aren’t necessarily always the most expensive, but price isn’t their selling point and they may cost more than the cheapest tariff.
The green power market is growing steadily, with nearly 52% of power coming from low-carbon sources in 2017, compared with 35% in 2013.
Economy 7, Economy 10, or time-of-use tariff
With these, you’ll typically get cheaper ‘off peak’ energy for either seven or ten hours a day.
Economy 7 usually has its off-peak hours around midnight and 7am, whereas Economy 10 spreads its cheapest hours throughout the day at set times.
Off-peak energy can be cheap, but whatever you use outside of these times will be charged at a much higher cost. You’ll get a special meter to monitor rates.
This could be helpful if you can arrange to use energy at off-peak times. But if you know you won’t change your habits to make the most of the discounted rates, think before you switch.
For more details, have a look at our guide to Economy 7 and 10 tariffs.
50% of people could save up to £345** on their duel fuel energy costs based on Compare the Market data in February 2020.
**Where a saving can be achieved 50% of people could achieve a saving of £345.00 on their dual fuel energy costs based on Compare the Market data in February 2020.
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