'Pay in advance' energy a poor dealChoose an online tariff or leave money in the bank
12 June 2009
Households looking for peace of mind on gas and electricity prices might be tempted by a new tariff launched today by energy giant Scottish Power that promises a fixed discount of 5% on its standard monthly direct debit gas and electricity prices.
The ‘Pay in Advance Energy’ tariff works in a similar way to a tracker mortgage, in that the discount is fixed at 5% but the actual price you pay will vary depending on whether Scottish Power’s standard prices go up or down.
There is, however, a rather sizeable catch for those interested in this offer – as the tariff’s name suggests, you have to pay for your energy costs upfront (a minimum of a year’s worth of energy at a time). Scottish Power says that paying this way ‘offers good value for money and is an excellent way for customers to make their money work harder.'
Put to the test
To put the supplier’s claim to the test, we examined how the new tariff would work for a typical gas and electricity customer in the East Midlands region using 3,000 kWh of electricity and 20,500 kWh of gas a year – these are the energy industry’s standard figures for a ‘medium user’.
At current prices, such a customer would currently pay £1156 a year (including a £10.50 ‘duel fuel’ discount) on Scottish Power’s standard monthly direct debit tariff.
Switching to the pay in advance tariff from the standard tariff would give an annual bill of around £1097 a year – a saving of £59, assuming that prices don’t change for the next 12 months. Although this is not insignificant, it is nowhere near the £129 you’d save on Scottish Power’s ‘Energy Saver 5’ online dual fuel tariff – so paying upfront for all your energy won’t even get you the cheapest deal Scottish Power is currently offering.
And if you don’t want to manage your energy account online and prefer paper bills then the company’s ‘Discounted Energy July 2010’ tariff, which guarantees that your prices will always be 3% below its standard prices until July 2010, would cost you £1120 a year – just £23 more than the pay in advance tariff. Paying this way would also let you make monthly payments of around £93 over a 12 month period rather than a single lump sum.
That £23 saving would drop to just £13 if, instead of paying £1097 upfront to Scottish Power for the pay in advance tariff, you put the £1120 that its cheapest non-online tariff would cost you over a year in a Best Buy savings account, such as Chelsea Building Society's Rainy Day Savings Account, and paid your 12 £93 monthly payments to Scottish Power out of the account.
Subject to your personal circumstances, this would earn you in the region of £10 in interest at an annual rate of 2% calculated monthly. If you did the same thing with the £1027 you’d pay on the online tariff then you’d probably be about £139 better off than if you went with the pay in advance deal, as you would save £129 on your energy alone and accumulate a further £10 in interest.
Scottish Power says that customers can pay a maximum of £20,000 for their energy in advance. However, it is important to remember that energy companies are not banks so any money they hold of yours is not protected. According to regulator, Ofgem, if an energy supplier goes bust and is not taken over by another company then customers that have paid money for energy they haven’t used would become unsecured creditors, with the prospect of losing some - or all - of their money.
Better deals available
Which? policy advisor Fiona Cochrane said: ‘Scottish Power’s pay in advance tariff does not seem to be a particularly good way for its customers to make their money work harder – in fact, for those willing to manage their energy account online there are far better deals available that don’t mean locking your cash away without the protection you’d get if it was in the bank.
‘The savings over an equivalent non-online tariff seem to be modest at best – and marginal when you take into account the interest you’d earn if you simply put the money in a savings account and paid monthly instead of as a lump sum. And that’s before you even take the lack of statutory protection for consumers’ money held by energy companies.
‘Unfortunately, most people don’t have the means or the time to scrutinise tariffs in the way that Which? can. That’s why we’re calling for Ofgem to introduce minimum standards to help consumers choose the best value tariff – including key information such as a break down of energy costs on a daily basis and an explanation of how various discounts work.’
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Scottish Power told us that it believes there is 'a sizeable percentage' of the market that has no wish to manage their energy accounts online and/or pay by direct debit and said that it had seen strong take-up of the tariff since its launch to existing customers in February.
'This product was primarily designed to service this market and offer an energy deal that would offer a competitive price position in line with the best direct debit offers on the market. This is an innovative development for an offline cash only offer,' a spokesperson explained.
'We firmly believe that Pay in Advance is a viable and valuable addition not only to our own product portfolio but the market as a whole, providing an offer which services the needs for an often overlooked group of customers for the first time. This is demonstrated clearly by the strong up take for the offer we have had from our existing customer base since its launch in February.'
Alison Morrison from Which? Switch, the free energy switching service from Which? said it was essential that that consumers look at all the options available to them.
‘Consumers simply taking tariffs at face value could lose out. Some deals aren’t always as good as they seem – and there are often better ones available from the same company. By comparing all the available tariffs, Which? Switch can help consumers make the right decision.’
People switching their gas and electricity to a dual fuel tariff through Which? Switch saved on average £257 on their annual energy bills last year.
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