Deciding between short-term flexibility and long-term stability has been a long-standing debate when deciding electricity contracts. Each one has its own pros and cons. In this article, we explore all of your options and hope to add some perspective. There is no right or wrong answer, especially given the timing of when you read this. The market could be up, or it could be down. Either way, it is our hope that we can help with your decision-making process so that you can signup for the electricity plan that’s best for you.
Long-Term Electricity Contracts
Long-term typically denotes some level of commitment. When it comes to electricity contracts, any plan that is 24 months or longer, is typically considered long-term. Max contract length for residential is up to 36 months. With commercial electricity contracts, you can go up to 48 months. In some case, even up to 60 months.
What are the benefits of long-term electricity contracts?
The main idea with long-term contracts is to lock-in your savings. When you believe the market is down or starting to trend upward, it’s generally a good idea to lock-in your prices. Or, if you’re foreseeing there to be major world or weather events on the horizon, that could trigger prices to go up. In these cases you would want to guarantee your savings beforehand and seek a long-term electricity contract.
Similar to locking in your mortgage interest rate, here’s some reasons why it makes sense to lock-in your electricity contract for the long-term:
- Saving Money: when you opt for a long-term contract, you’re more likely to see increased savings. This is especially true the further you go out (ie 24 or 36 months). By contrast, short-term contracts tend to be more expensive, but not always. If you don’t plan on moving any time soon and have a fairly bullish outlook on the economy, then a long-term contract may be best for you.
- Saving Time: shopping for electricity, or shopping in general for some people, can be a hassle. If you’re not the type who likes to monitor the electricity markets, balance a budget, or prefers to “set it and forget it”, then long-term contracts could be the way to go.
- Predicability: if you’re someone who likes to play the long-game and not worry about weather or economic events and how they could affect your financial outcome, then opting for a long-term contract could help keep your costs down.
What are some of the risks with choosing a long-term electricity contract?
While there are many benefits of long-term contracts, they are not without risk. Let’s explore some scenarios.
- Market Movement: when you may have bought into a long-term contract, the energy market could’ve been real low. And when it comes time to renew, the new prices could come as a shock because of how much the market has moved up. This is especially true after any major weather event, like hurricanes, weather storms, or major economic events (ie wars, embargoes, oil or natural gas production cuts etc).
- Less Flexibility: most retail electric providers have modified their early termination fees on select products and made them more customer friendly. Many have done away with large fees and instead opted for a small fee per month remaining on your contract. Depending on your cost-benefit analysis, it could be the difference between riding out your contract vs paying the fee and jumping ship.
Bonus tip: if you’re moving residences, then you’re able to cancel your plan without penalty so long as you can provide a forwarding address to your new location.
Short-Term Electricity Contracts
Short-term typically denotes flexibility. You’re looking for an interim solution. When it comes to electricity contracts, any plan that is less than 24 months, is typically considered short-term. With residential, there’s either month-to-month plans or very short term ones (ie 3, 6 or 9 months). There’s also pay-as-you-go plans. In these cases you’d want make sure you understand the terms and are aware of their fee structure. With commercial electricity contracts, we can customize the length however short you’d like.
What are the benefits of short-term electricity contracts?
The main idea with short-term contracts is to give yourself the flexibility to change your mind and find a better deal as soon as you see one. When you believe the market is up (or near its peak) and starting to trend downward, it’s generally a good idea to ride the wave down. Or, if you’ve noticed that it’s been quite some time since the last major weather event, there’s peace talks, or the economy is improving, these could trigger prices to start slipping or come down. In these cases you would want to opt for a shorter-term contract. You will still get the benefits of fixed-rate price of energy, but you’re not locked into for longer than you’d like.
Here’s some reasons why it makes sense to lock-in your electricity contract for the long-term:
- Increased flexibility: When you sign-up for as short-term electricity contract, you have the flexibility to shop around for lower rates. You can also change plans more frequently without fear of being stuck or paying enormous termination fees. Since short-term contracts have less commitment, they can be good if you move around a lot, are in-between places, or need an interim solution.
- More options: if you want to take advantage of market trends more easily and enter an electricity contract when you feel is at its lowest, then choosing a month-to-month option would give you the flexibility you’re looking for.
What are some of the risks with choosing a short-term electricity contract?
Short-term energy plans, while offering advantages, come with certain drawbacks to consider:
- Potential rate increases upon renewal: Although you may start with a low rate in a month-to-month plan, market fluctuations could lead to increased rates and higher bills later.
- Frequent renewal requirements: Short-term contracts necessitate more frequent renewals, increasing the chance of missing a renewal date.
- Budgeting challenges: Market price fluctuations make it challenging to anticipate future rates, complicating the creation of a budget with short-term electricity contracts.
Final analysis: what is the recommended contract length?
The recommended term length for residential electricity typically ranges from 9 to 24 months. Much can happen in the span of 24 – 36 months, and being stuck in a long-term contract can very well be a gamble. Whereas plans within the 24 – 36 month timeframe strike a balance between stable rates, potential early termination fees, and the option to switch to alternative plans or providers. They’re supported by more realistic projections concerning future energy production costs, Texas grid enhancements, weather patterns, and climate changes.