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Fixed Price Energy Deals - Grab or Avoid Them?

By Edited Jan 16, 2014 0 0

Any fixed price deal is a bet against future prices. If prices rise above your fixed price then you win, but if they fall below it then you lose.

Learn from the fixed rate mortgage scenario of 2009, when interest rates hit the floor overnight. The Lehman Brothers’ crash that initiated the 2008 Depression that we are still in, was not anticipated by anyone. Economists had expected mortgage interest rates to rise so offered fixed rates that anticipated those higher interest rates. When mortgage rates fell to 5%, those on fixed rates were still paying 12%.

Pros of Fixed Rates

If you need to know how much your energy bill will be next year and the year after then a fixed rate will offer that. You are protected against massive price rises, but at the cost of probably paying more than you would otherwise have paid. It’s a kind of insurance against price rises in energy supply and you have to pay a premium for that insurance.

Cons of Fixed Rates

The rate is fixed by energy company economists to benefit the company. You may think you are getting a good deal, but on average you will pay more than you would on a flexible tariff.

Read the small print and be careful that you read what it says rather than what you expect it to say. Does the fixed rate only cover you up to a certain energy price? Can the company cancel the contract at any time and without notice? Do the fixed rates protect you against future tax changes? This last one is highly unlikely; certainly they will not protect you from any VAT increase.

If Energy Prices Fall

You will be better off if energy prices fall if you are not locked in to higher fixed rate charges. You feel the benefit of every reduction in the gas or electricity price per unit.

Energy prices are likely to fall over the next few years as governments come under increasing pressure to do something to reduce energy company profit margins. This is analogous with the mobile phone charges scenario a few years ago, where pressure was put on the phone companies to reduce their charges.

If Energy Prices Rise

If they rise you pay more if you are not on a fixed rate energy tariff. At the time of writing (November 2012) fixed rate tariffs are lower than standard ones, which suggests that the energy companies expect prices to fall. If they expected prices to rise then fixed tariffs would be at least equal to standard tariffs or even slightly higher.

Who Are Fixed Price Deals For?

If even a slightly higher energy price would break your bank and you want to insure against that eventuality then a fixed deal makes some sense.

Similarly if you are averse to any risk whatsoever then a fixed price deal might be for you because it would eliminate any anxiety associated with spiralling energy costs.

Who Should Avoid Fixed Price Deals?

Anyone who understands the numbers and thinks that fixed deals are just a way for energy providers to extract more money from consumers should.

Anyone who is averse to betting should similarly avoid these deals because by taking one you are betting against future energy prices and the only people who win from a bet are the people offering the bet, in this case the energy companies rather than a casino or betting shop,

Anyone who is suspicious of a deal that is just too good, should avoid fixing their gas and electric prices. If a company is pushing a deal it will never be for your benefit.

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