What is an index-linked tariff?
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All the information on Index-linked Tariffs.
Index-linked tariffs are those where the price of electricity varies according to the wholesale market, meaning you pay for your electricity at the actual price at which the supplier buys it, plus a small mark-up.
This means you can save money when the price falls, but you may also end up paying more when it rises, as there is no fixed cost and the price changes constantly.
How do index-linked tariffs work?
Index-linked tariffs are those whose prices are set on the basis of the wholesale market, the so-called electricity pool. With index-linked tariffs, the supplier charges you for each kilowatt of electricity consumed at the same price at which it purchased it on the wholesale market, plus a small administration fee (which constitutes its profit margin).
Let’s take an example: if electricity supplier X buys a kWh for €0.30, it charges you €0.30 plus €0.01 in administration fees, so in total you’ll pay €0.31 per kWh. This means that the price per kWh consumed will vary from day to day or month to month, because, as you may already know, the price of electricity on the wholesale market changes daily.
Features of index-linked electricity tariffs
Like most things in life, an index-linked tariff has two sides to it. And to ensure you aren’t caught out by any surprises, we want to set out as clearly as possible everything you might encounter when signing up for this type of tariff.
The main features of index-linked tariffs are:
- There is no fixed price per kWh. If the price per megawatt in the electricity pool falls, you pay less; if it rises, you pay more.
- The amount of the bill is unpredictable, because it is impossible to know what the market price of electricity will be more than one day in advance.
- The supplier does not bear the risk of rises in the market price of electricity, so if there is a sharp rise, your bill could skyrocket.
- The price per kilowatt-hour under index-linked tariffs rises when demand increases (in winter, summer and during the middle of the day).
- Although the price of an index-linked tariff is calculated based on the price of electricity in the pool, each supplier calculates it differently, so you won’t pay the same amount for all index-linked tariffs.
Differences Between Indexed Rates and Fixed Rates
The main difference between an indexed rate and a fixed rate is that with the latter, you always pay the same price per kWh, whereas with the indexed rate, you pay a different price per kWh each month.
Let’s take a closer look with an example:
Having an indexed rate is like going to fill up your car with gas: you never know what price you’ll be charged per liter because it changes every day, depending on whether the price of oil goes up or down or other variables that are beyond our control.
With a fixed-rate plan, it’s as if the gas station were charging you a set price per liter of gasoline or diesel, at the same rate all year round.
No matter how much the price of a barrel of oil goes up or down, you’ll always be charged the same amount—with the security and certainty that brings.
Differences Between Indexed Rates and Fixed Rates
The main difference between an indexed rate and a fixed rate is that with the latter, you always pay the same price per kWh, whereas with the indexed rate, you pay a different price per kWh each month.
Let’s take a closer look with an example:
Having an indexed rate is like going to fill up your car with gas: you never know what price you’ll be charged per liter because it changes every day, depending on whether the price of oil goes up or down or other variables that are beyond our control.
With a fixed-rate plan, it’s as if the gas station were charging you a set price per liter of gasoline or diesel, at the same rate all year round.
No matter how much the price of a barrel of oil goes up or down, you’ll always be charged the same amount—with the security and certainty that brings.
Is it cost-effective to have an indexed rate?
It depends on the state of the electricity market.
When generating electricity on the wholesale market is inexpensive, and the price per megawatt is low and stable, it may be a good idea to have an indexed rate.
But when electricity prices start to rise (as they are now), it’s much better to have a fixed-rate plan.
Since early 2021, the price of electricity on the electricity market has been rising steadily, going from €40 per megawatt in January to the current €300 (August 2022), with peaks of up to €700 per megawatt-hour seen in previous months.
Frequently Asked Questions About Indexed Rates
Here are the four most frequently asked questions that come up when signing up for an indexed rate plan.
1. What is the cost of electricity under indexed rates?
The cost of electricity has nothing to do with the type of rate plan you have.
The power charge is calculated based on the number of kilowatts you have contracted and the price set by each electricity provider for that power, regardless of the type of rate plan you have.
2. What are the best indexed-rate plans in 2022?
They’re almost all the same.
By their very nature, index-linked tariffs mean you pay almost the same price as on the regulated market, so you end up paying the same regardless of which supplier you choose, although there may be slight differences between the index-linked tariffs offered by different suppliers.
3. When is electricity cheapest with an index-linked tariff?
At times of high demand (summer, winter and midday), the price is higher under index-linked tariffs, and at times of lower demand, it is cheaper.
4. Can I apply for the Social Electricity Allowance under the index-linked tariff?
No. Index-linked tariffs are not eligible for this grant.
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