Earn interest from your energy supplier
Energy suppliers owe us masses of money in overpaid bills. One new supplier is leading the way with a fairer deal.
Relatively new gas and electricity supplier Ovo Energy has promised to pay customers a reward equivalent of 3% interest per annum when their accounts are in credit. The reward will show up on each account statement, which is monthly or quarterly depending on what the customer has requested.
The reward rate will stay the same till the end of this year and then it'll be reviewed every six months. Although Ovo hasn't said so directly it has implied that, when it reviews the reward, it will take into account movements in interest rates or the Bank of England's Base Rate.
The end of interest-free loans to suppliers
Credit interest is a unique feature that we've been waiting for from suppliers for a long time, as many of us are frequently in credit and often by hundreds of pounds.
Currently, suppliers offer the best deals to those of us who pay by direct debit, which is usually for a fixed amount even though our usage – and therefore what we owe – is variable. The idea is that in summer you build up enough credit to pay for the extra usage in winter.
Whilst this can be useful for budgeting, it does mean we're paying suppliers in advance when that money could be being put to more immediate use or earning interest. The second problem is even greater: we frequently come to the end of winter and still our accounts are in credit, as we were charged too much in the first place. The total credit often ticks up to hundreds of pounds.
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Suppliers don't always make it that easy for us to set direct debits at a fair level. It can also be hard to get our own money back when we ask for it, as many readers have reported. (Although suppliers must pay you back, if you insist. Talk and write to them politely but firmly to get your refund.)
With Ovo paying interest, it reduces the incentive for it to over-charge in order to get a free loan from its customers, and it'll reduce the resistance to paying us back when we ask for our money.
What does this mean for bills?
Using seasonal usage data to estimate when we'll be in credit and how much by, based on a £1,000 bill (which is very roughly the average bill) I calculate that we'll get slightly over 40p in interest – assuming your direct debit is set at the perfect level. So the financial reward is tiny, but that isn't the real benefit of getting interest.
The real benefit of Ovo paying interest isn't to get a load of cash back, it's to reduce the incentive for the supplier to let huge credits build up on customer accounts. You might not receive much interest, but perhaps you can expect not to be taken for a ride by this supplier.
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If Ovo did decide, like other suppliers, to let massive credits build up, or if one built up accidentally for other reasons, you'll now be rewarded. If you're in credit over a year by an average £250 – which is not unusual with the big six – you can expect £7.50 in interest, which is more than you'd earn if you invested £250 in a savings account at the moment.
Can we make some money with this?
Ovo says that we won't be allowed to pay more than one year's worth of bills in advance. However, if we pay just one year in advance we could expect roughly £15 in a year, based on a £1,000 bill. If Ovo lets us overpay by a year up front and then let's us keep topping it up every month, we might be able to get more like £30 per year. However, the incentive for Ovo to balance the books may now be strong enough that it will actively pay us back when we've overpaid. That's a big turnaround from the other suppliers.
Recent question on this topic
- pasquires asks:
In most quotes Ovo are no longer table-topping. Although they're still pretty cheap, even £30 interest probably won't be enough to make it the cheapest for most customers, and remember most of us will probably get closer to 40p. However, Ovo has taken several steps to be open and honest with customers and to provide a good service, which is rare in this industry. Remember to bear that in mind when you're comparing prices.
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