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Energy price cuts: should I switch supplier?

As EDF announces a reduction in its gas tariff we assess if it is worth switching energy supplier, or whether you should wait

EDF Energy has become the first of the ‘big six’ energy providers to cut its prices. Here we explain what that means for its customers as well as those of the other energy companies:

Is this a straightforward good news story?

It’s always good when a company cuts its prices. However, it is a relatively small reduction and, unusually, only applies to gas and not electricity. The 5% cut will mean an average reduction in bills of about £40 a year and will come into effect on 7 February.

Does this make EDF Energy the cheapest supplier?

EDF claims that when the cut comes into effect it will offer the cheapest standard tariff for typical use for all payment types and in all regions. However, this doesn’t make it the cheapest available overall, as a company’s standard prices are always its most expensive. If you are on your company’s standard tariff you should switch away and will almost certainly save money.

The two cheapest options now come from two of the smallest energy suppliers. First Utility is the cheapest supplier with average bills of £1,030 a year on its iSave v9 tariff. However, Joe Malinowski of the energyshop warns that this comes with a catch: it has a very high standing charge (the fixed amount you pay daily to your gas and/or electricity supplier) and the price is based on customers getting cashback of 13% of their spend at the end of the year.

Next cheapest is Ovo Energy, which cut its prices on 6 January. Its Energy Fix will cost the average household £1,059 a year.

The cheapest variable rate tariff is currently from Scottish Power at £1,085 a year.

What will other suppliers do now?

Almost certainly cut their prices, and probably by more than EDF.

Mark Todd of price comparison website Energyhelpine says: “Bearing in mind that wholesale gas prices have plummeted 32% since early September, this price cut is at the lower end of expectations.”

There has already been considerable speculation that British Gas is about to cut, and where British Gas goes, others follow. In fact, some commentators are taken aback that EDF got there first, as British Gas usually leads the pack.

The latter is under a lot of pressure to reduce by more than 5%, so expect bigger cuts in both gas and electricity from the supplier. The reasons for this are twofold: firstly, British Gas put its prices up earlier (in August) and by substantially more than EDF (electricity prices rose by 16% and gas by 18%).

The second factor affecting British Gas is that it announced in November 2011 that it was simplyifying its tariffs, doing away with the majority to instead offer only two tariff types: variable and fixed. Previously, the company – along with all other major suppliers – offered a complex array of cheap online tariffs to get to the top of price comparison tables, while offering customers on other tariffs a poor deal. Now its pricing is more transparent it is going to be harder for it to hide any uncompetitive tariffs.

Do the expected cuts mean my energy bills will definitely fall?

Not necessarily, because even when suppliers cut standard prices it doesn’t mean they will fall across all their tariffs. For example, in the past a company would call its cheapest tariff, say, Online 20. When it cut standard prices it would also launch Online 21, a new cheapest tariff, which would put it at the top of the best-buy tables. However, those on Online 20 would be left on the old price and would be hit with an exit penalty if they tried to switch to Online 21.

Energy suppliers are now under a lot of pressure, chiefly from regulator Ofgem, to change this sort of practice. “In this new environment of fairness, it should be that all a supplier’s tariffs track the standard rate downwards. It will be interesting to see if this happens,” Malinowski says.

Should I switch supplier now or wait for other cuts?

It largely depends on how much you are paying and whether you will incur any exit penalties for switching. If you are not subject to penalties, check our switching service and see if you can get a better deal.

The ideal scenario is to fix at the bottom of the market. The Ovo Energy deal is a fixed tariff and is already substantially cheaper than many of its rivals’ better offers, so is certainly worth considering. However, if you are paying only slightly more than Ovo’s price it might be worth waiting to see what other suppliers do.

Are prices going to keep coming down?

Sadly not. Malinowski says the market is now in a “small downward phase” and that, unless something drastic happens in the wholesale markets, prices are not expected to shoot up again this year. However, over the longer term, even if wholesale prices don’t go up substantially, the environmental and social costs built into energy bills will increase leading to one eventual outcome: bigger bills. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds