Beware Of Energy-Switching Advice

Updated on 17 February 2009 | 30 Comments

Routine guidance not to switch in winter when there are cheaper tariffs available makes no sense.

We've said for some time here that it makes sense to frequently monitor your gas and electricity bills and switch your energy tariff every so often. Switching is a useful tool when it comes to keeping your household bills under control.

The tricky bit is deciding when to switch. A few commentators say that you shouldn't switch your tariff until all the big six suppliers have changed their prices, because these suppliers typically change prices over the same period. But I'm not convinced.

The advice to wait doesn't take into account several factors: people's seasonal usage; the length of time between the first supplier lowering prices and the last; the pricing methods of the suppliers; or the capped rates that are on offer.

On capped rates

Capped rates are the easiest starting point. Back in February 2008 and for the following few months, many commentators recommended that people shouldn't switch. However, this site recommended switching to capped rates. In both January 2008 and December 2007, I recommended them myself.

If you'd gone for some of the best capped-rate tariffs when commentators were saying `don't switch', you'd now be as well off or better off than the best non-capped deal available today. With one you'd be easily 10% better off today, and it is fixed without a penalty for leaving.

The market is not so simple

It's not just capped rates. With one non-capped tariff (nopower SOL 10) that was available to new customers in February 2008, an average Londoner would currently be £160 better off.

That's why, in order for anyone to give you proper guidance of when to switch, you need to understand what exactly is happening in the market. In my view, no one understands better than Florian Ritzmann of Xelector, a familiar name in Fool articles.

Xelector powers The Fool's comparison tool and Ritzmann, who has ten years experience in the industry, often provides expert advice for me. My area is finance, not energy, and I don't pretend otherwise, so with gas and electricity articles my advice is second-hand. Ritzmann has accurately predicted the rise and fall of prices over the years and supplied you and me with a lot of other money-saving tips.

Ritzmann says that the market does not work as simply as most commentators think it does. They fail to take into account that energy usage is seasonal and that it takes time for a switch to become effective. It makes no sense to delay a switch when usage is high - in the colder months - to when it is low - late Spring and Summer. But that was the standard recommendation last year.

It takes too long for all suppliers to change prices

As usual, what he has to say makes sense to me, and I've ran a few numbers to test it (numbers being more my thing). If you wait till all the suppliers have put up their prices before switching, you'll then have to wait another two to four weeks before the switch takes effect. More importantly, suppliers typically take two to four months to catch up with each other when the first one moves, which means it'll be mid-April to the end of June before you are on a new tariff if you follow the standard guidance again this year.

I suspect many of you haven't switched for about a year, so by not taking a look at what is now available, you may continue to pay what could be a higher cost for your older tariffs (or older versions of a tariff) throughout the remaining cold months, and when it's warm in several months' time - and you don't need your heating - you'll get a cheaper tariff.

More tips

You don't want to wait if you see a good capped tariff. Ritzmann's position on capped tariffs at this time is to take one if you find it is no more than 10% more expensive than the cheapest uncapped and it lasts at least two years. He adds: `Capped tariffs are based on allocation principle. A supplier will buy energy forward, price in a margin, and make the product available until the kWh allocation is filled, then the product is withdrawn.'

Not only this, but Ritzmann says it applies to discounted tariffs too. If a supplier adds a cheaper tariff, that cheap price will disappear as soon it's fully taken up. If you wait you'll miss out on this, as Londoners did by missing the npower SOL 10. You may not ever be aware it had existed, if you wait three months for all suppliers to change.

Following guidance to wait throughout winter and spring when cheaper tariffs have become available - normally with no press announcement - costs you money. This guidance also ignores that some suppliers now offer retention deals; `For example, an npower, standard-rate customer could save 10%-15% within two weeks of putting an upgrade application through, with no strings attached. It's not always about switching suppliers, sometimes it's just a tariff.'

Looking for the cheaper rates (which are not announced in the papers) during the winter months makes more sense for most of us than waiting till April or June, when the majority don't use anywhere near as much energy. You should switch based on seasonal factors, not on the price changes that are announced in the media.

> Compare gas and electricity prices.


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