Energy tariff types and how to compare them

This week I have had cause to look at tariff rates with even great scrutiny than usual and I have looked at many. Throughout the week energy suppliers have been removing out of date tariffs and replacing them with new ones as is usual behaviour and in that time I have seen at least three different energy suppliers in the top spot with the cheapest dual fuel tariff in the market if you are interested in knowing who is the cheapest right now, and so this blog doesn’t become immediately out of date, click here.

One think that is immediately obvious is how difficult it actually is to compare energy tariffs directly. Every time you enter details into a price comparison website like our own you are provided with a snapshot of the market for very exact variables. Firstly your location and then your usage. What you may not realise is, that as your location and usage details change, then so do the results of the comparison. What may be the cheapest tariff for Mrs Smith next door, will not necessarily be ideal for your family and what is cheapest for you, won’t be for someone else. I am often asked ‘What’s the cheapest deal in the market?’ and I have to response with, ‘Well… that really depends…’ When I say that it is often treated with suspicion, as if I might be changing my answer, or withholding vital information. The true is of course, it really does depend on how much you use and how you want to pay.

To break it down, energy tariffs basically fall into one of four categories;

  1. Two tier tariffs with no standing charge
  2. No standing charge tariffs (which typically have a highest unit rates)
  3. Low standing charge tariffs (which typically have high unit rates)
  4. High standing charge tariffs (which typically have low unit rates)

There is a lot of blurring between these lines and varying degrees of similarity and difference between tariffs and pricing structures, however these four categories cover the majority of scenarios. To work our which would best suit you, you would need your energy bill to work out what type of user you are, but if you have a big home, a big family and high usage, then typically type 1, or 4 will suit you best, if you live alone, have a well insulated flat and are a typically low user, then you’ll be better off with type 2, or 3 however, how, or why would you know that?

Tariff comparison rates (TCR’s) were introduced as part of the 2010 Retail Market Review (RMR)  as a mechanism to help customers easily compare between different tariffs, a TCR features on every bill and on every price comparison service and is designed to help you compare prices. The regulator Ofgem was trying to simplify pricing and make bills clearer and more understandable. The objective was to create something akin to the ‘APR’ rate we have become familiar with through financial products like credit cards and loans. The ‘APR’ rate works well. The TCR does not. The problem with the TCR is that it only takes a very narrow view, the TCR compares tariff rates as one specific usage level, 3100kw for electricity and 12500kwh for gas. What that means is the results won’t necessarily be comparable to you.

The following graph shows the different tariff types and indicates the TCR with the vertical arrow. As you can see the green line (representing no standing charge tariffs) is the lowest, or cheapest for very low usage at the bottom of the graph, but the most expensive at the other end of the scale for very high usage. Contrary to that the grey line, representing high standing charge tariffs is the most expensive for low users, but the cheapest for the highest users. As I am sure you can see, the TCR arrow cuts through the graph where all four tariff types are similarly priced, not very helpful if you don’t actually know your usage because you’ve just moved house, or if your circumstances are changing.

My advice as ever, is to ensure you get a recent bill and make sure you complete an accurate price comparison to ensure you are on a tariff suitable for you and if your circumstances change, or you are in the process of moving, then do it again.

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