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Are Fixed Price Energy Deals a Good Bet?

By Edited May 11, 2015 0 0

Most energy companies offer fixed price deals whereby you lock your energy prices for one to five years. These deals are always a gamble and you need to think about what will happen to energy prices over the lock-in period.

If energy prices rise above your locked-in rate then you have won your bet and can gloat over your neighbours who have to sit in the dark because they cannot afford to use their lights.

If energy prices fall then you are still going to be paying the locked-in higher rate. This is what happened when mortgage interest rates fell and those on fixed-rates were left still paying their higher rate until the fixed-rate period ran out.

Will Energy Prices Rise?

Common sense would indicate that energy prices will rise over the long term as supplies of fossil fuels run out or become more expensive to extract. Carbon taxes in Europe will add to the cost of any fossil fuel, too.

Electricity and gas prices have risen almost every year in living memory and have only very occasionally gone down, but short-term price reductions can and do happen.

Will Energy Prices Fall?

In the whole of Europe there is a public outcry about energy company profits. Profit margins have increased and people’s fuel bills are higher, even though they have insulated their homes and switched to CFL or LED lighting.

Most European countries tax fuel bills heavily, so there is massive potential for prices to fall if governments cut their fuel taxes either in a bid to court popularity or as a way of stimulating their economies.

What Do the Energy Companies Want You to Do?

If companies are urging you to lock yourself into a fixed price electricity and gas price deal then that is what their economists see as good for the company. If companies expect prices to fall then they will try to lock you into a higher, fixed price deal. One thing they do not care about is helping you to minimise your spending on heating and lighting.

If fixed price deals are lower than non-fixed price deals then company finance officers expect prices to fall and they have anticipated this fall by offering lower than current prices in fixed price deals.

For Example - If today’s non-fixed price is 13p per unit and the fixed price deal is 12.5p per unit then companies are expecting the non-fixed price to fall to 11p per unit in the medium term. Their profits will be higher if they can lock customers into the higher (12.5p per unit) price.

If the fixed price rate is higher than the non-fixed deal then companies are expecting prices to rise. Using the same figures, if today’s non-fixed price is 13p per unit and a two year fixed deal unit price is 14p per unit then the company expects the price to go above 14p per unit, but is still trying to get more out of fixed price customers than they would pay on an ordinary, non-fixed tariff.

What Do You Do?

You want to pay as little as possible for your heating and lighting.

The company on the other hand wants you to pay as much as possible for those essentials.

Do you do what the company wants you to do?

Logic would say that the company employs economists whose jobs depend on being able to predict energy prices accurately.

Only a fool would bet against those economists. On average, fixed price deals make the company more profits and make their customers pay more for their fuel bills.



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