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Will recent world events prompt higher energy bills in the UK?

The world is in turmoil.  Egypt, Libya, Yemen and Japan, natural or manmade, rarely have we seen such frequent and diverse unrest.  While the impact of these events will be felt for decades to come by the people who live in these regions, the consequences will be felt in less direct ways much closer to home, not least following the impact this turbulence is already having on energy markets.  So will our bills go up and should we all be rushing to switch onto fixed tariffs to protect our prices?

Global unrest has caused dramatic increases in wholesale gas markets and it is looking more and more likely that this will impact standard domestic prices.  The relationship between wholesale rates and the prices we pay isn’t as direct as you might think; the majority of the gas and electricity you receive from your supplier is bought years in advance through confidential contracts.  In fact, suppliers only buy a minority of their energy on the open wholesale markets so it should be possible to control the impact on domestic prices.  That said, suppliers do purchase a non-trivial proportion of their energy in this way, they are facing higher costs than were forecasted and history tells us when suppliers face higher costs so do we.

The price increases we saw during the winter are fresh in people’s minds and it will be a very brave supplier who imposes further price hikes on its customers in the very near future.  Nor will they want to run the risk of having to push up prices twice in quick succession if they underestimate the impact, so increases towards the end of this year seem more likely, by which time markets should have stabilised.

In the meantime, we are already seeing a much more immediate impact on online and fixed tariffs which are being withdrawn from market at a dramatic pace.  EDF Energy, npower and SSE have all withdrawn their most competitive offerings in the last two weeks without introducing alternatives while fixed tariffs, particularly the cheaper ones, are also disappearing fast.

These tariffs are designed by suppliers, in a large part, to attract new customers.  This means they to need buy incremental energy over and above that which they have bought on long term contracts, for this suppliers look to trade on wholesale markets and as these costs here rise their margins erode and tariffs are withdrawn.

There are a range of fixed price tariffs still available, however, but are they the answer to our problems?  Will the protection they offer from price rises work out financially better in the long term?

To answer this, let’s first remember a few axioms of fixed products, risk rewards and protection costs.  Put another way, to guarantee the price you pay markets will typically set prices at a level which they expect will represent a premium against non- fixed products, across the term of the contract.

So does this mean that fixed plans are bad?  Well, in short the answer is no, for two reasons: first, suppliers and markets can’t predict the future and prices could rise faster than they forecast, meaning you are financially better off. Second, paying a little extra to have the peace of mind that you will not be face rising energy costs will represent its own value to many people.

If the security and protection fixed plans offer appeals to you, you then need to pick the right plan for you.

There are two key elements of fixed tariffs: the price and the length of the fix. The trade-off is the longer you want to fix your prices the more you will have to pay.  Tariffs range from three month fixes, costing not much more than cheapest online plan to four year fixes charging a premium in the region of £185.

Everyone has a different attitude to risk, but I tend to shy away from recommending short term (one year or less) fixed term products.  Here’s my reasoning… if I sign up to a one year fixed product today paying a representative £65 premium on the cheapest tariff in the market how much would prices need to go up by for me to ‘win’?  Let’s assume that prices go up in six months’ time (which seems reasonable), then they would need to go up by £130 per year for me to benefit enough in the second six months of the fix to outweigh the additional cost in the first year.  This is equivalent to a 15% price increase, which is higher than I expect to see this year.

Once you get past 1 year fixes, for example with npower’s Go Fix 5 giving you an extra 2 months fix, or EDF Energy’s fixed plan lasting all the way to 2015, things start to get more interesting. From this point it’s all down to your own preferences around risk.Do you want to be paying the cheapest prices available right now and risk future price rises or are you happy to pay more now in the hope that in years to come you could be protected from ever rising prices?  The choice, as they say, is yours.

See also:

News: How do wholesale prices affect our gas and electricity bills?

News: Customers told to hurry as suppliers pull their cheapest energy deals