Standard variable versus fixed rate energy tariffs: what’s the difference?

Standard variable and fixed rate energy tariffs have been a hot topic recently, with many suppliers removing fixed rate tariffs from the market amid the energy crisis, and customers on standard variable tariffs being impacted by the new energy price cap. 

In the past, the solution to rising energy bills would have been to shop around and switch to a cheaper fixed rate tariff. But the world of energy looks very different now. The traditionally more expense standard variable rate tariffs are now over 50% cheaper on average than the best value fixed rate deal. 

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says: ‘For the vast majority of the life of the cap, it has simply limited how much energy companies could charge people on their most expensive tariff, so you could save hundreds of pounds by shifting to a better deal. However, over the past six months, as prices rocketed, the market changed dramatically, so that currently no deal is cheaper than the price cap.’

What is the difference between a fixed rate tariff and an SVT?

Image credit: Future PLC

An energy tariff is simply how companies charge customers for the gas and electricity they use. 

You can get single fuel tariffs, where you pay for your gas and electricity separately or dual fuel, where you pay together. 

The actual product that comes through your pipes and wires will be exactly the same, whichever tariff or provider you choose. 

There are two main types of energy tariff:

Fixed rate tariff

With this tariff, the cost per energy unit used is fixed for the length of the contract – typically 12 to 18 months. If the wholesale cost of energy rises or falls it won’t affect what you pay. This makes it easier to budget, but you will miss out on savings if the market prices drop. You can normally switch deals up to 49 days before the end of your contract without facing an early-exit penalty.

Fixed rate deals tended to be cheaper than the standard variable alternatives and were often used as a way to compete for new business. 

But due to spirally energy costs, there are no cheap fixed rate deals to be found at the moment.

Standard variable rate tariff (SVT)

If you don’t do anything when your fixed rate tariff comes to an end, then your provider will automatically put you on to their standard variable rate plan. It is called ‘variable’ because what you pay per unit of energy can change each month depending on the wholesale price of energy. 

Providers can only charge you as much as the current energy price cap. Unlike a fixed rate deal, you can leave a SVT at any time without facing a penalty.

How do I know which tariff I am on?

According to comparison website Comparethemarket.com, 20% of energy customers aren’t sure what tariff they are on. Over half of those on fixed rate deals don’t know when their contract comes to an end. 

If you haven’t switched energy providers in the last couple of years – or ever – then you will likely be on the standard variable rate tariff.

You can easily check by looking online at your billing information or calling your provider directly.

Which should I choose?

Image credit: Douglas Gibb

If you are on a fixed rate deal, you should continue to pay the same amount each month even when the energy cap goes up in April, unless your provider goes bust. 

If your contract is coming to an end or has ended and you are currently on the supplier’s SVT, again, it will probably be best for you to do nothing. The cheapest fix on offer right now is an average 56% more expensive than the energy price cap. 

Coles adds: ‘If you haven’t already switched to paying by direct debit, it’s worth doing so, because people who pay by cash or cheque are charged £130 extra a year.’

While there is no harm in looking around and calculating whether it will be worth moving, at the end of your fixed rate contract you will be moved on to the SVT which is protected by the price cap. The other benefit is that you won’t be locked into that deal, so you are free to move when prices do eventually fall.

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