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Short-Term vs. Long-Term Energy Contracts

5 minutes
10/09/2023
A pair of glasses rests on a stack of papers

Have you noticed what’s happening with energy rates? Over time, the energy to power our homes is costing more and more. Compared to pre-pandemic levels, residential electricity rates are up 20-30% or more. One way to cope with the effect of rising rates is to select the right energy plan. With just a little effort, you may save substantial sums every year.

In deregulated states, energy consumers can select a short-term or long-term contract offered by a residential energy supplier (REP). Each type offers distinct advantages. In general, short-term electricity plans offer flexibility while long-term contracts offer stability.

Which is best for you? Lifestyle and budget considerations will guide you as you seek out a reputable energy supplier offering a great rate.

Short-Term Electricity Contract Benefits

Those with short-term electricity plans have the freedom to act if rates drop. They also have the freedom to take advantage of new promotions offered by competing electricity suppliers.

Long-Term Electricity Contract Advantages

It’s easy to understand why an energy supplier would offer you a lower monthly rate on a long-term contract. They can accept a little less profit each month in exchange for a guarantee you’ll be with them for an extended period of time.

Choosing Between Short or Long-term Contracts

For many energy consumers, a 12-month plan balances the risks and rewards of short- and long-term contracts. The longer the term, the bigger the commitment, but the greater the stability. And, you’ll spend less time researching and renewing energy contracts.

The Appeal of Short-Term Electricity Contracts

An electric contract is considered short-term if it is less than one year long. The most common lengths are six months, three months, and one month. The latter is typically called a month-to-month or variable-rate plan.

Consumers with a variable-rate deal are vulnerable to sudden spikes in rates. On the other hand, such a plan allows you to quickly benefit from rate drops.

Pre-paid plans are a special kind of short-term electricity plan. You keep enough money in your account to cover your charges before they are incurred. There’s no long-term commitment and no credit check. Opting for such an electricity plan is much like prepaying for cellular telephone service.

Benefits of short-term contracts

  • Flexibility
  • Potential for competitive rates
  • Adaptability to market changes
  • Opportunity to sign up when rates are low

Potential pitfalls of short-term contracts

While short-term electricity plans do offer distinct advantages, there are potential drawbacks. Budgeting is less predictable, for example. Also, your energy rate may gyrate up and down as demand fluctuates throughout the year. Demand is often highest during the hottest and coldest times of the year.

Also, some energy consumers will not want to repeatedly deal with renewing their short-term electric contracts. Bad timing can be costly. Act too soon, and you may be hit with an early termination fee. Act too late, and your current contract may automatically renew.

The Stability of Long-Term Electricity Contracts

Depending on the energy supplier, the length of a long-term electricity contract may range from 12 to 60 months. The most common terms are 12 and 24 months.

Benefits of long-term contracts

  • Rate stability and predictability
  • Opportunity to lock in a great rate for years
  • Potential for consistent savings
  • Reduced renewal hassles

The key advantage of a long-term, fixed-rate plan is the ability to lock in a good rate for a long time. A long-term deal can give you peace-of-mind. You’ve locked in a rate, and you won’t have to renew it for some time. This makes it easier to plan your finances.

Limitations of long-term contracts

Locking in a rate for a long time is not so great if rates subsequently drop. The only way to take advantage of lower rates is to break the contract. This might trigger an early termination fee (ETF).

A long-term electric contract can also become a liability if you become disillusioned with your energy provider. ETFs take several forms:

  • A fee for every month remaining on the contract
  • One set fee for breaking the contract
  • A potentially costly charge for liquidated damages
Pro Tip:

Look for long-term electricity contracts with low or no termination fees.

Factors to Consider When Choosing an Electricity Contract

There are important factors to think about before you commit to an energy plan. Improve the odds of choosing the right energy contract by doing three things:

  • Understand your energy usage patterns
  • Review past energy contracts
  • Research available energy suppliers

Assess your energy consumption patterns

It is vital to understand your electricity usage patterns when selecting a contract. Be aware of your peak usage times, and identify a plan that aligns with it. For example, you’ll only benefit from a “ free nights and weekends plan” if you use a high enough percentage of your energy at those times. If your daytime usage is high, and there’s no good way to shift it, a fixed-rate plan is typically better.

Or, reduce the impact of peak usage by adopting energy-efficient habits and investing in smart home devices.

Reflect on your previous energy contracts

Allow your past energy contracts to pinpoint preferences and illuminate your decision making. What part of your previous plan worked for you, and what didn’t? Also, consider whether your energy needs have recently changed. This could point you in a new direction the next time around.

Research available energy providers

There are important differences between REPs. As you compare energy providers, consider important variables like reputation, customer service, and transparency.

Consider geographical and seasonal factors

The greater the seasonal temperature swing in your area, the greater the potential impact on peak and off-peak rates. Consumers who use more electricity during off-peak hours may opt for a time-of-use (TOU) plan.

Such a plan substantially reduces rates during off-peak hours. Higher rates apply when users are pulling more electricity from the grid. In general, this occurs during the daytime, and on weekdays. It also happens during heat waves and cold snaps when cooling and heating needs spike.

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, review the following:

  • Whether you live in a deregulated state
  • Your energy usage patterns
  • Your current energy contract length and prices

Frequently Asked Questions (FAQs)

Q: When are electricity rates typically the lowest?

A: Electricity rates are typically the lowest during off-peak hours. While these vary from one energy supplier to another, they apply mostly during nights and weekends. If you have the ability to shift your usage somewhat to off-peak hours, a plan with hefty off-peak discounts might work for you.

Q: What are the standard durations for energy contracts?

A: Long-term energy contract lengths typically range from 12 to 60 months. In general, 12-and 24-month contracts are most common.

Q: Is it necessary for the contract length to align with my lease term?

A: No. If you are a renter, don’t worry about the length of your energy contract vis-a-vis your apartment lease term. Instead, focus on a deal that aligns with your patterns of energy usage.

Q: What if I decide to move?

A: If you’re moving within the same electricity area, your energy contract can travel with you. However, if you’re moving outside of your current electricity area, your contract ends, typically without penalty.

Compare Energy Plans Today

Make an informed decision after weighing the pluses and minuses of the contracts offered by competing energy suppliers. Determine what is best for you and your personal situation.

Find the best fit for your personal energy needs. Explore and compare energy plans at Price to Compare!