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The Electricity Tariff - Explained

So, you’re thinking of making the switch or moving home? Perhaps you've already switched but you just don't have a clue what any of the jargon means on the tariff label or electricity bill? Have a read of our simple guide to electricity tariffs so you can make an informed decision with confidence before signing your soul away in the fine print.


Do you need help reading your bill? Click here to visit your company bill explanation guide.


 

How do I pay?

There are generally three options that you can opt for when choosing your payment method on your quotation: Direct Debit; Cash or Cheque; and Pay as You Go. Each has their benefits; however, we recommend that the majority of our customers opt for direct debit. Not only is direct debit much more customer-convenient, but most companies will actually offer discounts for those who pay using this method. For example, E·ON offer a £35 a year saving on your electricity standing charge if you chose to pay with direct debit.


 

Types of Tariff

The two principal tariff types offered by energy utilities are fixed and variable. Each relate to the unit rate per kWh. This means that you are going to pay a fixed or variable rate for your electricity. Variable tariffs will adjust according to the wholesale price of electricity; this means your bill may get cheaper or more expensive; whereas, if you’re on a fixed tariff, despite often having a slightly higher unit rate than the then-present variable tariff, it will not change for your contracted tariff duration, leaving you safe in the knowledge that your bill is not going to soar at any given moment.


 

Unit Rate

The unit rate refers to how much each kWh* of electricity will cost you. This will fluctuate in a utility’s variable tariff; however, remains at a fixed rate if the customer has opted for a fixed tariff.

*kWh = Kilowatt Hour. Simply put, it is a unit of measurement for energy. It is what energy companies use to convey a customer’s gas and electricity usage. It is, however, rather difficult to transfer this into daily activities; it basically means that if you left a 1000W appliance on, it would take one hour to use one kWh unit. In a real life scenario for example, 1 kWh has the ability to power a 42” plasma TV for around 3 hours.


 

Standing Charge

A ‘standing charge’ is a fixed price charge that is added to your bill in order to cover utility costs such as:

  1. Keeping your house connected to your Distribution Network Operator
  2. Carrying out meter readings
  3. Maintenance
  4. Contributions to government initiatives such as helping out vulnerable homes.

Since the Retail Market Review in 2010, energy regulators Ofgem have tried to create a fairer market for consumers by preventing the over-inflation of pricings by making the claim that it was to cover fixed costs. Now, every energy tariff in the UK has to contain a standing charge. This makes the costing structure much more transparent and easy to understand. This price is usually displayed on your quote as ‘per day’ in a pence figure. Companies, however, are permitted to set their charge to £0, meaning that you will not have to pay a standing charge on these tariffs.

£0 Standing Charge

As mentioned above, each energy tariff has to have a standing charge figure. There isn’t, however, anything stopping energy companies from charging their figure at £0. This might sound like a good thing; however, it frequently is not. Generally if a company offers a £0 standing charge, their energy unit rate is much higher in cost than the industry average, reverting back to the unclear, non-transparent costing system that Ofgem are trying to eliminate. If, however, you have a property that is uninhabited for much of the year, this may be something to think about, as you will only be charged based on how much energy you are using.


 

Terms & Exit Fees

A contract length will only apply to fixed-term tariffs, as this will be the amount of time that you wish to freeze the given price until. For example you could perhaps choose a tariff that has a unit rate of 13.81p per kWh that is frozen until 2018. Technically, you do not have to fulfil your contract until the agreed termination date, however, failing to do so will unfortunately incur an exit fee. If you wish to change providers or tariffs before the end of your term, you will have to pay a predetermined exit fee. This varies between companies.


 

VAT

All costs, discounts and incentives are subject to a standard VAT rate of 5%.