Spring 2020. The papers are full of it: energy prices are in free fall due to the lockdown and the favourable weather conditions. For thousands of households, it’s the ideal time to change their gas and/or electricity contract and save up to 374 euro (source: CREG). But when you’re comparing your options, you have a mental block: should you choose a fixed price or a variable price contract? What’s the difference between the two? Which is more suitable for your energy consumption profile?
If this situation sounds familiar, you’ve come to the right place! We’re going to explain everything you need to know about these two types of pricing. You’ll then be sure you’re making the most appropriate choice for your situation when you change energy contract.
If you choose a fixed-price gas or electricity contract, it means that the price you pay per kilowatt hour (kWh) will stay the same throughout the duration of the contract. So you will receive a consistent price over a given period (often one or three years). This is the safe option.
By contrast, with a variable-price energy contract, the price you pay per kilowatt hour will be indexed every month or every three months based on a specific index.
For example, for gas, the majority of suppliers use the TTF103 index (the quarterly reference index for gas in Belgium). So the price of gas per kilowatt hour (without the fixed elements, such as network costs) is calculated according to the formula TTF103 + X, where
– TTF103 is the index value which varies every quarter (expressed as c€/kWh) ;
– X represents the supplier margin (expressed as c€/kWh) .
This type of contract tends to be closer to the market reality. By choosing this option, you will be able to benefit from reduced prices when the gas or electricity price falls significantly on the wholesale markets, but you will also suffer the effect of a price increase.
As we have seen, both types have their advantages and disadvantages.
Note also that variable prices, like fixed prices, only affect the cost portion of the energy in the total price you have to pay. As a reminder, here are the elements that make up gas and electricity prices:
In reality, it’s quite complicated to compare fixed prices and variable prices because of their nature. For an effective comparison, you would need to take into account the price change that occurs every month or every three months for the variable price. However, it is impossible to predict it accurately. One solution would be to base your calculation on the prices over the past 12 months to try and determine a trend. However, this exercise will not give you an accurate prediction or allow you to make a full comparison between the two types of prices.
So how can you choose between these two pricing methods if you cannot accurately determine which will be most profitable in the long term? To find out, you need to rely on other factors:
Perhaps you like speculating on energy prices and you’re not worried about an increase in the gas or electricity price. Better still, perhaps you think that the current prices may fall further over the coming months. If so, a variable-price energy contract would suit you.
If, however, you don’t want to risk an unexpected increase in gas or electricity prices, as that could adversely impact your household budget, it would be better for you to choose a fixed-price contract. The stability offered by this contract will allow you to plan your general expenditure more comfortably, with no risk of a nasty surprise when you receive your bill.
Sometimes, it’s not a question of your appetite for risk. Sometimes, you just need to rely on the economic situation. Even if you are not a speculator, there are some rather exceptional situations which indicate that there are opportunities to be seized.
For example, during the Coronavirus crisis, gas and electricity prices have reached historically low levels. In this type of situation, it would be particularly beneficial to freeze these prices with a three-year fixed contract. For even if variable contracts seem more attractive when you compare contract prices, don’t forget that the situation may change quickly over the coming months. With the economic recovery at the end of lockdown, the price per kWh may rise, making a variable-price contract less attractive than a fixed-price contract at that time.
Once you have decided on the type of contract you want, you need to check which supplier is offering the most attractive fixed or variable contract.
A price comparison site such as Energyprice.be can help you, as the site allows you to specify whether you want a fixed-price or a variable-price contract. It will then display the best results available at that time.
Fixed prices or variable prices? Ultimately, there is no right or wrong decision. It’s up to you to decide: do you want stability, even if it means paying a bit more, or do you think volatility will be in your favour?
If you still can’t make up your mind, please contact one of the Energyprice.be advisers. We can then review your consumption profile and help you define the characteristics of your ideal energy contract.Respond!