How do you cut fuel bills before the winter chill sets in? Go online

As competition heats up in the home energy market, finding the best deals can be confusing.

(PAUL GILHAM / GETTY )

With winter just around the corner millions of Britons will be turning their attention to their energy bills and how to ensure that keeping out the chill doesn't mean taking a wrecking ball to their finances.

Recent movements in the energy market have seen several companies offer cheaper tariffs just in time for the cold weather, but while these changes will hit the headlines, what do they really mean for consumers?

Several of the biggest energy companies have announced new tariffs hoping to entice the tens of thousands of households that have recently come off a fixed tariff. The cheapest offer is from a small supplier called First Utility, with an average bill of £958.83 per year. Another new entrant to the market offering competitive prices is Ova Energy, with an average annual bill of £978.67 on its New Energy tariff.

"We've seen movement from most of the online deals as they battle for position to be the cheapest deal on offer," says Scott Byrom, the utilities manager at price comparison website Moneysupermarket.com. "It is encouraging to see new entrants in the market aggressively lead on price."

These smaller companies are able to offer such prices by taking advantage of recent falls in wholesale prices, while the big six suppliers – British Gas, EDF Energy, E.On, npower, Scottish Power, and Scottish and Southern – are still using energy bought months ago, when industry prices were much higher. However, Mr Byrom says that this energy is coming to an end, so the smaller firms' position at the top of the results may be short-lived.

Despite the online price war, anyone expecting spectacular price drops will be disappointed as most of the big six have indicated that they have no plans to pass on the dramatic falls in wholesale energy prices since last year. This has understandably outraged consumers, but firms blame it in part on the volatile nature of wholesale prices and the potential for costs to increase next spring.

Many people switched to a fixed-rate tariff in summer 2008 and protected themselves from the second round of price hikes, which came in the autumn. Many will now be at the end of their fixed deal and are advised to act quickly to avoid being automatically moved to a more expensive standard tariff. These tariffs are typically the least competitive tariff offered by each company, with the customer paying by cash or cheque.

"I'd encourage anyone on a fixed rate deal that has come to an end to switch again, as their default rates are poor in comparison to the best alternatives online," says Gareth Kloet, the head of utilities at price-comparison site confused.com.

The difference between standard and online energy tariffs can be substantial, which the energy firms say reflects the extra processing costs of bills. The average standard tariff with Scottish Power, for example, costs £1,361.95, in stark contrast to its average online tariff at only £972.38, a difference of almost £400.

All the biggest energy suppliers offer internet-based tariffs, allowing customers to manage their accounts online and enter their own meter readings, thus eliminating the risk of over or underpaying on an estimated bill. There are no paper bills with an online tariff, and customers can either pay by direct debit or log into their accounts and pay their bills each time they receive an email reminding them that a payment is due. "With online tariffs, there are no worries about estimated meter readings. You're getting 100 per cent accurate bills and you're in control," says Mr Byrom.

While switching is generally touted as the key to reducing your energy bills, many consumers are baffled by the sheer volume of options. Consumer groups have criticised energy firms and called for more transparency, saying that consumers are confused by the range of products on offer and the complexity of their bills.

"It's difficult for consumers," says Fiona Cochrane, a senior policy advisor at consumer group Which?. "There are over 4,000 tariffs to choose from, so how can you expect someone to make an informed decision?"

Another aspect of switching that makes life difficult for consumers is that best-buy tables rarely tell the full story. These are based on average energy consumption, so if you're a heavy or light user they will not paint an accurate picture. Deciding on the type of tariff can also be tricky. Most people get their gas and electricity from separate suppliers, known as single-fuel tariffs, but switching to a duel-fuel tariff and having the same supplier for both gas and electricity is usually cheaper. It may also be helpful to have only one bill and one company to deal with for all your energy needs. However, where you live will play a part, so while a duel-fuel tariff with a single supplier may be the cheapest choice in one area, in another, it may be prudent to have separate providers. The advice is always to shop around carefully, comparing prices based on your actual location and usage.

Typically, capped or fixed tariffs, which involve being fixed at a set rate for a certain period of time, are not the most competitive tariff type because companies want to safeguard against wholesale price increases. If prices rise, those with capped tariffs will benefit. But for those who need to budget carefully, a fixed rate could be the best option. However, remember that while a fixed tariff offers some security, some of these deals have substantial exit fees and require a 12-month commitment.

"If you're on a tight budget, you may want to opt for the best fixed-rate deals around, purely to give yourself some security over potentially rising energy prices as winter takes hold. People use much more energy in the winter, so don't put things off," says Mr Kloet.

Some suppliers have introduced "market-tracking" tariffs, which work in a similar way to tracker mortgages that follow the base rate. A market-tracker tariff follows the movement in the wholesale market, with a rate review every three months. A market tracker is only a good idea if you're willing to risk price increases in the wholesale market in exchange for any wholesale reductions.

Usage habits should also play a key part in your decision. Economy 7 tariffs have two pricing structures; a cheaper one for the night, normally between 1am and 8am, and a considerably more expensive one for the day, although times can vary depending on suppliers and regions. This may work out cheaper if you use at least half of your energy at night and have storage heaters.