Short-Term vs. Long-Term Energy Contracts

Deciding Between Short-Term and Long-Term Electricity Contracts

There’s a lot to consider before entering into a new electricity contract. Factors such as the contract’s length, rates, fees and terms and conditions all have an impact on your total energy costs. But exactly how do electricity contracts work? And is a short-term or long-term electricity contract better at helping you save?

It’s important for you to weigh the benefits as well as the disadvantages of short-term vs. long-term electricity contracts. By choosing the right contract now, you may be able to save on energy expenses in the future.

Short-Term and Month-to-Month Electricity Contracts

Short-term electricity supply contracts are usually under a year in length. Some common offerings include six-month, three-month and month-to-month electricity plans. Depending on the plan you choose, your rates in a short-term electricity contract may stay the same or fluctuate based on the market. For example, month-to-month electricity plans are also known as variable-rate plans because the rate you pay may change each month.

With these types of contracts, you’ll need to shop around for new rates more often. This can be a good or bad thing depending on the time of year you start or renew your contract.

The advantages of a short-term electricity contract

Understanding the benefits of short-term vs. long-term electricity contracts will help you figure out which option best fits your needs. The following are some of the advantages of a short-term electricity contract:

More opportunities to sign up when rates are low. A month-to-month electricity plan allows you to possibly take advantage of market trends more easily and potentially enter your contract when electricity rates are lowest. By tracking the factors that impact electricity rates, such as which season it is and consumer demand, you may be able to secure a lower rate if market prices are down.
Greater flexibility. In a short-term electricity contract, you have the flexibility to shop around for lower rates — if they exist — and change plans more frequently. Since they require less commitment than long-term contracts, short-term electricity contracts can be a good option if you move around a lot.

The risks of a short-term electricity contract

Despite the advantages, short-term energy plans also have some drawbacks to consider. Below are some of the risks of a short-term electricity contract:

Potentially higher rates when renewing. You may enter your month-to-month electricity plan with a low rate, but there’s no guarantee you’ll keep it long. If market prices go up next month, you may get stuck paying a higher rate.
Need to renew more often. Short-term contracts need to be renewed more often than long-term contracts. This makes it easier to accidentally forget your renewal date.
Harder to construct a budget. With so many factors affecting market prices, it can be tough trying to predict what your renewal rates will be. This uncertainty makes it difficult to develop a budget with a short-term electricity contract.

Long-Term Electricity Contracts

Long-term electricity supply contracts can last from one to five years, or 12 to 60 months. Some of the more common long-term energy plan lengths include 12-month, 24-month and 36-month contracts. These types of electricity contracts usually have rates that remain the same regardless of changes in market prices.

In comparison to short-term contracts, long-term contracts are bigger commitments. But with that commitment comes more stability in your electricity bill each month.

The advantages of a long-term electricity contract

In exchange for a bigger commitment, you can enjoy the benefits of a long-term electricity contract:

Stable and predictable supply rate. In a long-term contract, you pay a consistent supply rate for the duration of your contract. So, if market rates go up over high-demand seasons, you won’t have to worry about renewing your contract or adjusting your supply rate. This predictability also makes it easier for you to budget your expenses.
Potential for extended savings. If you enter a long-term electricity contract when rates are low, you’ll keep that rate throughout the duration of your contract. This allows you to potentially save over a long period of time.
Less time spent shopping and renewing rates. Another benefit of long-term electricity contracts is that you won’t have to shop for rates and renew your contract as often as you would in a short-term contract. This saves you the time and hassle of having to regularly compare electricity supply rates.

The downsides of a long-term electricity contract

Although the stability of a long-term contract is nice, there are some disadvantages to these types of plans. The following are some downsides of a long-term electricity contract:

Can’t take advantage when market prices drop. In a long-term electricity contract, you’ll have fewer opportunities to shop around for new rates without breaking your contract. This lack of flexibility means you may be stuck with a higher rate if market prices drop.
Greater level of commitment. Long-term electricity contracts can last up to 60 months, so they require greater commitment than short-term contracts. This means more difficulty (and possibly penalty fees) changing rates or switching energy providers mid-contract if you’re unhappy with your supply service.

Is a Short-Term or Long-Term Electricity Contract Better?

We’ve discussed how these types of electricity contracts work, but is a short-term or long-term electricity contract better? Each plan offers a different set of benefits, so the best option will largely depend on your situation and household’s needs. For example, factors such as the time of year you’re entering your contract and the current market rates in your area may influence your final decision.

When comparing short-term vs. long-term electricity plans, the biggest difference is stability. A long-term contract offers a stable supply rate and a predictable monthly bill. This makes it easier for you to construct a budget and predict your future energy costs. The peace of mind you get from avoiding surprise rate hikes is one of the most attractive benefits of a long-term electricity supply contract. That’s why it’s one of the most popular plans among residential customers.

A short-term or month-to-month electricity supply plan won’t offer the same degree of stability. If you can tolerate more risk, it’s possible to save money with a short-term plan. But you’ll have to put in more work to follow market trends and shop regularly for the lowest available rates. Even then, there’s no guarantee that you’ll find a lower rate and save money.

Regardless of your choice, it’s important that you understand your energy supply contract and carefully read through the details before signing up. If you rush to make a decision, you could end up with high rates or unsatisfactory service for the duration of your contract. Don’t be afraid to ask your provider any questions you may have about the plan(s) you’re considering. A reputable energy supplier will be able to walk you through the fine print and explain some of the common energy terms found within your contract.

What to consider before entering an energy contract

In addition to contract length, there are some other factors to keep in mind before entering an electricity plan. To find the right energy plan for you, consider the following:

Your energy consumption habits. By understanding how much energy you use and the time of day you use it, you can make informed decisions regarding your contract. For example, some energy providers offer a free nights and weekends plan. But if your daytime electricity usage has been higher, that may not be a good fit for your household.
Your energy plan history. If you know the electricity contracts you’ve had in the past, you can use that experience to help guide your current decision. Think about what in the contract worked for you, what didn’t work for you and which, if any, of your energy needs have changed since then.
Your energy provider. You should know who your electricity provider is as well as how they compare to other suppliers in your area. Research things like reputation and customer service reviews to avoid getting stuck with a provider that doesn’t meet your expectations.
Your physical location. As mentioned earlier, it’s important to compare electricity rates in your region before deciding on a contract. Knowing the difference between peak and off-peak seasons in your area can help you decide when to sign onto a plan and for how long, if you’re in between contracts.
Contract terms, conditions & additional costs. It’s always a good idea to read through the various terms and conditions of your electricity supply contract. You’ll be able to not only find out about any additional costs but also better understand your electricity bill each month.

This article provides an in-depth look at short-term vs. long-term electricity supply plans, comparing everything from their advantages to their potential drawbacks. But it’s your personal situation — for instance, how much you value stability vs. risk — that will ultimately determine which option is better for you. It’s important that you take the time to understand energy and how you use it. From here, you can compare your electricity contract options and select the best plan for your household.

Looking to compare some long- and short-term electricity plans? Constellation could have the right residential electricity plan for you.