Ovo offers new fixed-rate energy deal but how do households know when to switch and what is a good energy deal?

A new fixed rate energy deal - which is cheaper than the current price cap - is being offered by one of the UK's major energy suppliers.

Ovo Energy has put forward a fixed tariff for its existing customers that is cheaper than the current £2,500 energy price guarantee.

Fixed deals used to be cheaper than the energy price cap and were a way for gas and electricity suppliers to lock customers in for a set period of time with a tempting price for every unit of energy they used.

But when wholesale prices began to rocket, most fixed deals fell away and left customers with little choice but to stick with their current supplier on a variable tariff.

However, with energy prices forecast to come down later this year could Ovo's deal be the first sign that fixed deals are making a comeback? And what does that mean households should do if they're offered a fixed-rate contract?

What is Ovo Energy offering?

Ovo has offered existing customers a one-year fixed deal that is, on average, around 9% cheaper than the current Energy Price Guarantee.

This means that for someone on the typical use figure - of around £2,500 a year for gas and electric if you use the average amount and live in an average sized property, it would make your bill £2,275 instead. (Albeit this rate and actual bill is still dependent on usage, but the example acts as a guide to compare)

For anyone who wanted to exit this deal early once they've signed-up - it will cost them £150 for dual-fuel or £75 for electricity only.

Fixed rate deals are also popular with customers who like a guarantee of what they're going to be paying in the months ahead - and this deal will do that by also take customers off of a variable rate tariff which is open to change.

Is this a good deal?

While it's definitely cheaper than current prices, with expectations that gas and electric charges are to drop over the coming 12 months it's harder to predict whether it will eventually turn out to save customers money in the long run.

In a message on his Money Saving Expert website, Martin Lewis issued a word of caution, suggesting that people need to be careful not to jump into a deal they'll still be locked into one prices start to come down.

He explained: "People need to be very careful not to just jump on a fix because it costs less than they're paying right now. If you're on a standard tariff, the rates you pay are governed by a cap. That cap is currently set by the Energy Price Guarantee, and will stay roughly stable until the end of June.

"After that, because wholesale rates – the rates energy firms pay – have dropped, it's likely the Price Cap will drop, and on current predictions that means you'll start paying 20% lower rates than now. That price is predicted to stay around that point until the end of the year, and into early 2024, though it changes every three months and the further ahead you get, the hazier the crystal ball gets.

"So based on those predictions, unless a fix is more than 15% cheaper than your current standard tariff – and this one isn't – it's unlikely to be cheaper over the year."

Will more fixed rate deals follow?

If energy prices do fall as expected after June, while the exact reduction is unclear, experts do think it will prompt energy suppliers to bring back fixed rate energy deals just as Ovo has done.

A lack of fixed rate deals has meant there has been little competition between suppliers in the energy market and it is hoped a return of more deals could change that for customers.

Energy expert Ben Gallizzi from Uswitch, which helps customers find the best deals available on the market, said the next stage would be for suppliers like Ovo to start offering fixed rate promotions to all households and not just existing customers.

He explained: "It’s great to see a supplier offering fixed deals to their customers, but the next step is for them to start promoting fixed tariffs to every household.

"We hope that OVO’s actions will encourage the rest of the industry to start offering competitive tariffs of their own in a return to full-scale switching.

"Competition in the energy market will give consumers the chance to vote with their feet and choose a supplier that best meets their needs - whether it’s price, customer service or green credentials

"Our analysis suggests that suppliers could currently be offering fixed deals costing between £2,200 and £2,500 a year for the average household."

How can customers know if they should switch?

With very little competition currently in the market, and prices currently frozen by the government price cap, customers have been left with little choice but to stay with their current supplier.

However, with prices expected to come down by - it is hoped - as much as 20% after June it could trigger more movement among suppliers.

Customers may then be presented with a choice between the variable rate that is subject to fluctuations or a fixed-rate deal that will lock them into a price structure for a set amount of time.

But with energy prices having been so volatile, energy experts can't be sure what the future holds.

Ben Gallizzi added: "When fixed deals return, consumers will need to weigh up whether signing up to one is the best option for their individual circumstances.

"Over the duration of a fixed deal, the price of the standard variable tariff (set by either the Energy Price Guarantee or the price cap) could increase or decrease depending on a number of factors.

"One benefit of switching to a fixed deal is that it would give you confidence and clarity over what rates you will be paying for the deal duration, which has historically been between 12 and 24 months.

"Being able to lock in price certainty is a major factor when deciding whether to fix an energy deal, especially given how volatile the energy market has proven to be in recent years. But considering the unpredictability of the energy market, no one can be completely sure whether sticking with a standard variable tariff or opting for a fixed deal will be cheaper in the long run."

And while people might snap-up fixed rate deals to remove the uncertainty over price hikes, Martin Lewis thinks it's unlikely that energy bills are to go back up in the short term.

He added: "As an aside, it's worth knowing the government has a limit in place on how much the cap can rise to in the worst case scenario (a cap on the cap, if you like).

"So if wholesale rates were to explode again – which isn't currently seen as likely – the maximum the rate could rise until April 2024 is 20% more than the current price."

So what can households do in the mean time?

In the absence of fixed-rate deals, and until more is known about possible energy prices for the rest of the year, website Money Saving Expert says customers should be focussed on three things.

Most importantly is cutting energy usage where possible to help ensure bills remain as low as is possible.

This should be followed, it says, by checking bills carefully to make sure they're paying the right amount and finally running a check to ensure their home is getting all the help and any benefits they may be entitled to.