Are fixed rate energy deals worth it? UK energy prices explained after new Ofgem energy price cap announced

Households received some good news on Thursday (25 May) when Ofgem announced its next energy price cap would fall significantly this summer.

The energy regulator’s new cap of £2,074 will be almost £1,000 below the level of the energy price guarantee from 1 July. It means monthly gas and electricity costs will fall by an average of £35.50 a month.

It comes after a small increase to bills in April, when the end of the government’s £400 energy bills support scheme meant people were exposed to higher prices. But they did not rise by as much as had been feared as the government delayed a 20% spike in bills that was set to accompany a decline in the support provided by the energy price guarantee.

Energy bills contributed to a fall in the UK’s headline inflation rate from 10.1% to 8.7% in April. But while the rate has come down, it did not drop as much as economists had forecast, leading to fears that the cost of living crisis is more embedded in the UK economy than initially thought. The country is now an outlier among the G7 nations when it comes to the CPI.

So, what will the new Ofgem price cap mean for energy bills - and can you start thinking about going for a fixed rate?

Are energy prices going down?

In a word, yes. From July, the Ofgem price cap (which is going to equate to an average annual bill of £2,074) will supersede the energy price guarantee (which will increase to an average of £3,000 per year).

Given we’re currently paying the equivalent of £2,500 a year on average for our gas and electricity, households are set for an annual saving of £426 - the equivalent of £35.50 a month. According to calculations by MoneySaving Expert founder Martin Lewis, bills will drop by an average of 17% - so, for every £100 per month people pay today, they will typically pay £83 a month from July.

Mr Lewis has recommended that households take a meter reading around the time when the new price cap takes effect on 1 July to “draw a line in the sand to show how much energy you actually used on the current higher rate” to avoid being charged more than you owe. He said smart meters will do this automatically, but analogue meters will see suppliers make an estimate of your usage unless you submit a reading.

A caveat to note about the new price cap is that prices are still more than £1,000 a year (£83 a month) higher than they were before the Covid-19 pandemic hit, according to energy consultancy Cornwall Insight. The firm, which has accurately predicted where the Ofgem energy price cap will go over the last 18 months, also said it does not “expect bills to return to pre-2020 levels before the end of the decade”. So higher prices are here to stay for a while yet.

Another thing to be aware of is that the drop in bills will not equate to the discount we received as a result of the government’s £400 support scheme last winter. But household energy costs should be lower anyway given we tend to use less energy over the warmer months of the year.

Meanwhile, Martin Lewis has warned that some consumers who are on fixed-rate deals could see their costs rise from 1 July, despite the fall in the price cap. "This time last year, with prices rocketing, some people took very high fixed rate deals,” he said. “Then the government launched the energy price guarantee, and for fairness, those whose fixes were more expensive than [it] had their tariffs subsidised so they dropped to the same level. From July as the subsidy will be set as zero, that subsidy will be removed and those fixes will go back to their original price.

"For people on those fixes, it is worth considering switching to a price capped standard tariff – possibly even if you need to pay exit fees. Though if you’re coming to the end of a fix you don’t pay exit fees in the last 49 days of the fix."

Should you fix your energy bills?

Before the energy crisis, fixing your energy bills was usually a sure-fire way of saving money. But when wholesale prices started increasing rapidly in late 2021 - a change which led to several energy suppliers going bust - the competition in the market that kept prices down, collapsed. And with no one knowing where peak energy prices would lie, fixing in a price became a gamble.

This situation has meant most households have opted to fall onto standard variable rates, or default tariffs. Ofgem statistics released alongside the new price cap show the number of homes on these tariffs numbered 29 million as of April 2023, including four million prepayment meter customers. Just three million UK households have a fixed contract.

Variable rates tended to be more expensive than fixes before the energy crisis, and were often followed by vulnerable households. Ofgem was only tasked with setting up its price cap by the Theresa May government to make sure the people who found themselves on this type of tariff were not being unduly ripped off. So, with energy prices going down from July, is the fixed contract business back up and running again?

According to Cornwall Insight’s price cap forecasts, the price cap will hover within £100 of the new price cap rate until March 2024 (i.e. around the £2,000 mark). While this is by no means set in stone - a widening of the Russia-Ukraine conflict could dramatically change things - it suggests stability is returning to the energy market.

According to consumer watchdog Which?, this is likely to translate into better fixed rates. "If prices start to stabilise, we may see some providers offering competitive fixed price energy deals for the first time in well over a year,” said Emily Seymour, energy editor at Which?.

"If these deals start to become available, then it will be worth doing a bit of research to see if there’s a deal that is cost effective for you while also offering good customer service. Remember to take into consideration any exit fees, as we’ve seen some companies charge large amounts if you wish to leave your contract early, should a better deal come along."

Ms Seymour urged consumers to check out Which?’s annual energy survey to see which firms are rated mostly highly by their customers when it comes to customer service.

Even if the rates being offered for a fix are still slightly above the price you’d pay on the energy price cap, they may be worth considering, according to comparison site Go.Compare’s energy expert Gareth Kloet.

“If price security is important for you, then fixing could be a great option. But that comes with a caveat that fixing is usually more expensive than a variable tariff – because of the security it brings – and that we are seeing very high exit fees for these fixed rates,” he said.

“Therefore, if you do decide to fix but then want to switch tariffs mid contract, you may be charged much more to exit that deal than you would have a few years ago. In recent weeks, we have seen these exit fees priced at around £300 when they have typically been around £100 for a dual fuel deal.”

Mr Kloet added: “So you can see that this isn’t a yes and no answer I’m afraid, it’s a case of deciding what is important for you as a bill payer, weighing up all the options and making an informed decision.”