What does ‘Fixed Price’ Actually Mean?
- July 15, 2020
- Posted by: admin
- Category: News
This is a topic which I thought was self-explanatory, but after being asked the same question recently by multiple customers – it became apparent that not everyone has the same understanding.
The topic today is around what ‘Fixed Price’ means in the context of your energy bills.
To simplify this area – it’s important to understand the following formula:
((Price x Quantity) / 100) = Cost
Price = The price per unit (e.g. p/ kWh or p/Day)
Quantity = The number of units (e.g. 2,000 kWh or 31 Days)
Cost = The cost in £ of the energy.
The formula looks fiddly, but all it’s doing is multiplying out the cost per unit (in Pence) by the number of units you’ve consumed. The result is then divided by 100 to get it back into Pounds.
Why am I telling you this, and who cares?
Well, when you are offered a ‘Fixed’ gas or electricity tariff – it’s the PRICE that is being fixed. The price won’t change during that contract term, but the overall COST will definitely change if you use more or less energy (Quantity).
This is important to understand as a Fixed tariff doesn’t mean a Fixed COST….your bills will still go up or down depending upon how much you consume.
But, my water bill is fixed – and so is my phone/broadband….
Energy is a little different from our other utilities like water and telecoms.
For water, it wasn’t always the ‘standard’ to meter each supply. All water supplied in an area came from the same companies (here in Rayleigh it was Anglian Water and Essex & Suffolk Water).
Home water was unmetered, and you just got given a water rates bill – which was a standard amount, regardless of how much you actually used. The supplier had a captive audience, so covering their overheads was quite easy…everyone just paid an average ‘rate’.
This would have been the equivalent of a fixed COST. nowadays, most of us are metered – so we pay for what we use. The water company set us on a p/cubic metre of water – and if we use loads of water – we pay more.
For telecoms, it’s a little different still. The same rules apply, but telecoms companies tend to offer bundled call packages. They effectively work out their costs and what you’re reasonably likely to use – and set a fixed cost accordingly. Whatever calls you’re likely to make during the period (subject to fair use) have already been factored into their costing.
This again is the equivalent of a fixed COST. However, if you didn’t pay extra for the call bundle – the fiddly energy formula still applies…you pay a set rate for each minute of each call you make.
When you see terms like ‘Variable tariff’ or ‘Fixed tariff’ on energy price comparison sites – or on your energy bills, these relate to the unit PRICEs themselves.
Your overall bill COST will always go up or down based on how many units (QUANTITY) you consume.
A variable tariff just means that the supplier is allowed to adjust the PRICE up or down as they see fit. E.g. if the cost of buying the electricity or gas goes up, they can increase your PRICE to cover their losses, or vice versa.
It’s an interesting area – and hopefully this short post has been useful (I hesitate to say interesting!)
Please drop us a note if you have any questions – or if you need any help understanding your current tariffs!