What a tariff is
A tariff is the set of prices and conditions that determine how your energy use is charged. It typically includes a price per unit of energy, a fixed daily or monthly charge, and terms such as length of contract and any fee for leaving early. Two broad styles dominate: fixed and variable. Which exists, and what they are called, depends on where you live. In some places the choice is wide, while in others a regulated default plan is the only option for many households.
How fixed tariffs work
A fixed tariff holds the price per unit of energy steady for a set period, commonly several months to a few years. If the market price rises during that time, your unit rate does not. If it falls, your rate does not fall either.
Some details matter:
- What is fixed. Often it is the unit rate and sometimes the daily charge. Taxes, network charges and levies may still change and be passed on, depending on the terms. Network charges are covered in the article on taxes, levies and network charges on bills.
- Your bill can still change. A fixed rate does not fix your total. If you use more energy in a cold winter, you will still pay more, because the bill is rate multiplied by use.
- Exit fees. Leaving early commonly costs something, though rules vary and some places limit or ban such fees.
- What happens at the end. When the term finishes, many plans move you to a standard or variable rate unless you choose a new one. That rate may be higher than the one you had.
How variable tariffs work
With variable tariffs, the supplier can change the unit rate during the plan. The change might follow a regulator’s formula, a published index, the supplier’s own costs or its own commercial decisions. Some variable plans are tied openly to a market price and update as often as every hour or every day, while others change a few times per year.
Typically, variable plans offer more flexibility. There may be no fixed term and little or no fee for leaving. In return, you accept that your unit rate may rise, and it may also fall.
The main trade-offs
Certainty versus flexibility. A fixed tariff gives predictability for the rate, which can help with budgeting. A variable tariff gives you the freedom to leave at any time and to benefit if prices drop, but you take on price movements.
Price at the start. Fixed offers are priced by suppliers according to what they expect the market to do and what it costs them to buy energy ahead. That means a fixed rate can look higher or lower than a variable rate on the day you sign. Neither is guaranteed to end up cheaper, because that depends on what prices do later, which nobody knows in advance. The article on why energy prices change explains some of the forces behind movements.
Risk to the supplier. If a fixed rate turns out to be much lower than market prices, the supplier is out of pocket. If it turns out to be much higher, you are the one who feels it. This asymmetry is part of why fixed offers can be withdrawn or repriced quickly in volatile markets.
A simple illustration
Imagine a household using 600 kWh in a month. At a fixed rate of 20 cents per kWh, the energy charge is 600 multiplied by 0.20, or $120. If a variable rate rises from 20 cents to 24 cents, the same use costs 600 multiplied by 0.24, or $144, a difference of $24 for the month. If the variable rate had fallen to 16 cents, the charge would be $96, which is $24 less. The numbers are invented to show the mechanics and are not typical prices.
The point is that a rate change is multiplied by your usage. A household using less feels a given change less, and a household using more feels it more.
Who each style tends to suit
People who tend to prefer fixed rates include those with tight budgets who dislike surprises, and those who expect to stay at their address for the whole term. People who tend to prefer variable rates include those who may move soon, who want to be able to switch easily, or who are comfortable with some uncertainty. Households that can shift when they use power may also look at time-of-use tariffs, which are a different design again, where the price depends on the time of day.
None of these is a rule. Personal circumstances, local rules and the plans actually available all affect what makes sense.
Questions to ask before choosing
- What exactly is fixed: the unit rate, the daily charge, or both?
- Can taxes and network charges change during the term?
- How long is the term, and what is the fee for leaving early?
- What rate applies when the plan ends, and will I be told in advance?
- For a variable plan, how is the rate set, and how much notice is given of changes?
- Are there other conditions, such as paperless billing or direct debit, that the price depends on?
Compare plans using the same usage figure and include both the unit rate and the fixed charge. A low unit rate paired with a high daily charge may cost more for a small household than a plan with the reverse. The explainer on standing charges and unit rates covers that point.
A measured takeaway
There is no choice that is best for everyone or in every market. A fixed rate trades possible savings for stability, and a variable rate trades stability for flexibility. Reading the terms, checking the end date and comparing on a like-for-like basis will tell you more than any prediction about future prices. This article is general information, not financial advice.