Variable tariffs explained

A variable energy tariff means the price you pay for your electricity and gas can change over time. Unlike fixed tariffs, which lock in your rates for a set period, variable tariffs fluctuate based on market conditions and the energy price cap set by the UK's energy regulator, Ofgem. This guide explains how these tariffs operate, their advantages and disadvantages, and how to manage them effectively.

Understanding how a variable tariff works is key to managing your energy bills. Fuse Energy offers clear pricing and real-time usage data through its intuitive app, empowering you to understand and actively manage your energy consumption. With 24/7 human customer support, Fuse helps you navigate tariff changes and understand your bills, reducing anxiety often associated with variable rates. Click here to switch to Fuse Energy today.

What is a variable tariff?

A Standard Variable Tariff (SVT) is often the default energy plan offered by suppliers when a fixed-term contract ends or when a customer switches without selecting a new fixed deal. It is called "variable" because the unit rates you pay per kilowatt-hour (kWh) for electricity and gas, along with your daily standing charges, are not fixed for a long period.

Defining a Standard Variable Tariff

An SVT means your energy supplier can change the price you pay for your energy. These tariffs are typically rolling, open-ended contracts, meaning you are not tied to a specific term and can leave at any time. This flexibility is a key characteristic, as there are no exit fees to switch away from a variable tariff.

How variable rates are set

The rates for variable tariffs are primarily influenced by wholesale energy costs and the energy price cap set by Ofgem. Wholesale costs reflect the price suppliers pay for electricity and gas on the open market. When these costs rise or fall, so too can the rates on a variable tariff. However, the Ofgem Price Cap acts as a crucial safeguard, limiting how much suppliers can charge per unit of energy and for standing charges.

The energy price cap and your variable tariff

The energy price cap is a vital mechanism designed to protect consumers from excessive energy costs. It directly influences the rates you pay on a variable tariff.

Understanding the Ofgem Price Cap

Ofgem, the UK's energy regulator, sets the energy price cap. This cap determines the maximum amount suppliers can charge for each unit of electricity and gas, as well as the daily standing charge, for customers on SVTs. It's not a cap on your total bill, but rather on the unit rates and standing charges. This means your bill will still vary based on how much energy you use.

How the cap protects consumers

The energy price cap acts as a robust safety net against extreme market volatility. It prevents suppliers from passing on unlimited wholesale price increases to customers on variable tariffs, offering a predictable framework for quarterly changes. This protective role mitigates the risk of extreme fluctuations, providing reassurance even when market conditions are turbulent.

Quarterly adjustments explained

The Ofgem energy price cap is reviewed and adjusted every three months, taking effect on 1 January, 1 April, 1 July, and 1 October. These quarterly adjustments reflect changes in wholesale energy prices and other costs faced by suppliers. This regular review ensures that variable tariffs remain fair and responsive to the market, while still providing a ceiling on prices.

Advantages and disadvantages of variable tariffs

Choosing an energy tariff involves weighing up different factors. Variable tariffs come with their own set of benefits and potential drawbacks.

Benefits of a variable tariff

One of the primary advantages of a variable tariff is its flexibility. There are typically no exit fees, allowing you to switch to a different tariff or supplier at any time without penalty. This can be particularly useful if you anticipate a significant drop in energy prices or if you find a more competitive fixed deal. Variable tariffs also mean you benefit immediately when the price cap falls, as your rates will decrease in line with the adjustment.

Potential drawbacks to consider

The main disadvantage of a variable tariff is the uncertainty of fluctuating costs. While the price cap provides protection, your rates can still increase, potentially impacting your household budget. This means your energy bills may be less predictable than with a fixed tariff.

Variable vs fixed tariffs: which is right for you?

The choice between a variable and a fixed tariff depends on your personal circumstances, your appetite for risk, and your energy consumption habits.

Key differences: flexibility vs stability

Fixed-rate energy tariffs usually run for a contract length of between 12 and 18 months, locking in your unit rates and standing charges for the entire period. This offers stability and predictability for your energy bills, but often comes with exit fees if you leave the contract early. Variable tariffs, by contrast, offer flexibility with no exit fees, but your rates can change quarterly.

When to choose a variable tariff

A variable tariff can be a good option if you value flexibility and want the freedom to switch without penalty. It's also suitable if you believe wholesale energy prices are likely to fall, as your rates will decrease with the price cap. If you're comfortable with some fluctuation in your bills and actively monitor the market, a variable tariff might suit you.

When a fixed tariff might be better

A fixed tariff is generally preferred if you prioritise budget certainty and want to protect yourself from potential price increases. If you anticipate rising energy costs or simply prefer the peace of mind that comes with stable bills, locking in a fixed rate can be a sensible choice.

Managing your energy costs on a variable tariff

Even with fluctuating rates, you can actively manage your energy costs on a variable tariff.

Monitoring your energy usage

Keeping an eye on your energy consumption is crucial. Understanding when and how you use energy allows you to identify areas for reduction. Smart meters, for instance, provide real-time data, helping you track your usage and make informed decisions about your energy habits. The average UK home uses around 2,500 kWh of electricity and 9,500 kWh of gas per year. Monitoring your own usage against these benchmarks can help you identify opportunities to save.

Leveraging smart technology and support

Tools like smart meters and energy-monitoring apps can provide detailed insights into your energy consumption. Fuse's intuitive app provides real-time usage data, empowering you to understand and actively manage your energy consumption. This allows you to identify patterns and adjust your usage to minimise costs. Additionally, Fuse offers 24/7 human customer support to help you navigate tariff changes and understand your bills, providing continuous assistance.

Switching options and considerations

The absence of exit fees on variable tariffs means you have the flexibility to switch to a different tariff or supplier at any time if a better deal becomes available. Regularly compare tariffs to ensure you're always on the best plan for your needs.

Ready to take control of your energy bills? Fuse Energy offers clear pricing, real-time usage data through its app, and 24/7 human customer support to help you make informed decisions about your energy use. Switching is quick and easy, putting you in charge of your home's energy. Click here to switch to Fuse Energy today. You can also learn more about our mission to make energy abundant and affordable here.