Capping energy costs:
Earlier this month British Gas announced its prices would be increasing by 12% for gas and 9% for electricity. A few days later, nPower said it was going to charge 17% more for gas and 10% more for electricity. And in August, Powergen announced price hikes of 18% and 10% respectively for gas and electricity. Faced with increased energy bills that will leave the average household paying around £1,000 a year, many will be wondering if they should be switching their gas and electricity contracts onto fixed price arrangements or a capped deal to protect themselves from future price increases. With a fixed rate, you agree a price with the energy supplier for a set term and no matter how high the energy cost goes, the price you pay remains the same. However, if prices should fall you still pay the same fixed rate. With a capped deal, the price has an upper limit. If the supplier then increases its rates, you can be certain the price you pay will not go above your ceiling rate. However, if prices fall the price you pay should fall too. You usually pay more at the start of a fixed or capped deal than you would if you stayed on an ordinary tariff - that extra amount is currently averaging 4%, according to switching company uSwitch. So the only way you will profit on fixes or capped deals is if prices on the standard tariff go up. However, it is worth bearing in mind that you are not tied to your tariff and can change to a different deal whenever you choose. Unlike mortgages, however, "there are no redemption penalties," says Paul Schofield, head of utilities at moneysupermarket.com. The big underlying question is whether wholesale gas prices - the cost at which suppliers buy energy to sell on - will rise or fall this winter. Although no one dares to second-guess the future, the consensus in the market is that prices have stopped rising and are likely to plateau or even drop. As Schofield says: "Most commentators are saying that prices will fall." Louise Boddy, managing editor of Heren Energy, which publishes gas prices each day, does not expect this winter to see the dramatic increases of last year, when prices averaged 61.2p a therm and hit a high of 180.6p on 15 March. Last week, the "forward" price for this winter - the amount paid now for long-term energy use - closed at 68.5p. And this week, prices dropped to 65.6p as warm weather helped reduce demand. As such, utility comparison sites are less keen on fixed deals than they have been in the past. "A few months ago, I'd have said that capped products were a good thing. I'm not so sure now," says Schofield. Joe Malinowski of TheEnergyShop.com agrees: "We don't think fixed price deals are worthwhile now." Looking to the future, Boddy comments: "All the signals we are getting from the supply/demand forecast and sentiments of traders in the market are bearish, although that does not rule out occasional spikes in prices in winter." With several new sources of gas in the UK opening up over the next few months - at least three new or expanded pipelines and a new dock for boats bringing in liquefied natural gas are expected - the overall prognosis at this stage is far better than last year. There could still be problems, of course. Later today, the Met Office will give its long-range forecast for winter and a bad outlook could increase prices. Similarly, as we are now a net importer of gas, a bad winter on the continent will push up our prices and problems in the US, our main competitor for receiving liquefied natural gas shipments, would increase wholesale prices. Even if prices do fall, it remains to be seen whether British Gas and other suppliers will pass on the lower costs to consumers. Even Heren Energy is reluctant to predict that this would definitely happen. "If wholesale prices do keep coming down, that will be the real test of whether competition is really working in the UK," says Boddy. Analyses of the costs of suppliers, including British Gas and EDF, by the Energy Contract Company have suggested that they have been losing money in providing gas and electricity (40 per cent of which comes from gas) to domestic consumers. So they may not rush to pass on any falls in wholesale prices. However, they will be under pressure to do so. Tim Wolfenden of uSwitch says: "We would be saying to suppliers that consumers should see any falls in wholesale prices passed on to them." Against this background, it would appear that now is not the best time to go for a fixed deal, unless you simply could not afford it if prices were to rise. Cassie Smith of Which? says: "It depends how risk-averse you are. This is one of those decisions which consumers are being left to decide for themselves." If you do want a fixed price, switching companies currently favour British Gas's Fix and Fall deal. Its opening tariff is no more expensive than the standard British Gas rate, and there is also the benefit that the tariff will be cut by 5% for the last 12 months of the deal up to December 2008. Powergen and EDF are also currently in the fixed and capped market. If you do decide to go for a fixed deal you need to read the small print. For example, if you left the Fix and Fall plan before 2008 you would miss out on the 5% reduction. Switching companies expect to see people continue to swap to other variable rate deals. Malinowski says that Atlantic Electric and Gas is receiving a lot of this type of transfer. He says its rates are "due an increase" as it is yet to follow the other companies in the latest round of rises. But even taking this into account, he expects its prices to stay competitive. People who want to switch providers or to investigate their position can start by going to independent watchdog energywatch , which lists 10 switching companies that have registered with it. You can get an indication in a few minutes of whether you would be better off changing supplier. Not everyone will save the £240 a year some switchers quote as the potential savings, but you could save £100. It will be worthwhile for many people now that average annual electricity and gas bills are going to hit the £1,000 mark. Or click here for our online energy calculator. 22.9.06