Is a short-term or long-term electricity contract a better deal? Well, it depends.
The cost of electricity can vary widely from month to month. That’s why consumers go for a fixed rate electricity plan. That way you’re protected from wild rate swings.
But how do you determine what length of contract to sign? Is a short term or long term electricity contract better? It depends largely on the region of the country that you live in and the time of year that you are shopping for a fixed rate. Learn about the benefits of the fixed rate contract and how to determine the best electricity contract length for you.
TL;DR: Long-term electricity contracts of 24-36 months are often the cheapest price and protect you against inflation. Economic indicators across the country are pointing UP for energy costs. In Texas, it’s high power demand for data centers, bitcoin mining and industrial processes. In the northeast it’s capacity costs that are increasing your bills. Time to lock in.
Why Choose a Fixed Rate Plan?
Fixed rate plans (regardless of the contract length) are cheaper than month-to-month plans. Why is this?
Because without a contract, the provider has to guess at how much electricity they need to buy to service customers with month-to-month contracts. If a provider’s estimate of usage is too low, they’ll have to purchase additional power at higher prices to meet customer demand. As a result, provider’s charge more for month-to-month plans to mitigate this risk.
With a variable, month-to-month plan, you’re at the mercy of the energy market with no way to accurately predict how much your electric bill will be each month. Granted, electricity providers must disclose historical pricing for the month-to-month plans, but that doesn’t mean you won’t be in store for an electric rate roller coaster ride.
With a fixed rate plan, you’ll pay the same energy rate per kilowatt-hour used each month during the term of your contract. The only variable will be how much power you actually use.
Now that we’ve told you why month to month plans are NOT the way to go, how do you decide the length of fixed rate plan?
Short-Term Electricity Plans
Short-term plans are those that are 12 months or less.
Depending on the time of year, short-term plans can be a real good deal. For instance, in Texas the most expensive time of year for electricity is summer, particularly July and August. But you can find great deals on short term plans, 3-6 months, in September/October and in February.
Why? Any contract term that avoids summer months of June – August will always be cheap! But when you expire, your contract could then renew during the most expensive time of the year. You’ve kicked the can down the road. Eventually you’ll have to pay a rate that gets you through the Texas summer heat.
In the Northeast, the most expensive time for electricity is the winter. Rates will be higher during the cold winter months and lower during the mild summer months. Electricity prices are always a function of supply and demand.
The short term deals will be better during summer in the Northeast. If you choose a short term plan during these months, you’ll have a great rate for a little while. When it’s time to renew, you likely won’t find as low a rate.
If you are shopping for a short term electricity plan because you may be moving, read this! You can sign up for a 12 month fixed rate electricity plan. In Texas, your Early Termination Fee will be waived if you provide proof of a move. Read: Moving Before Your Electricity Plan Expires? >>
Our Recommendation: Long-Term Electricity Plans
Long-term plans allow you to lock in a certain rate over 12 months. If you sign the contract when electricity prices are low, you’ll get a bargain that lasts. And if you’re signing when electricity prices are high, you may be getting a hedge against inflation, and higher prices in the future.
The rates for long-term electricity contracts depend largely on the forecast for the supply and demand for electricity in your area. And we have seen nothing to indicate that prices will fall. In fact, increased electricity demand in Texas, plus regulatory changes, have driven prices up. And in the northeast, capacity costs are through the roof, driving bills up by 10-15%.
Historical data combined with supply/demand forecasts are used to generate forward price curves for the wholesale cost of electricity. These price curves largely impact the energy rates that are offered to customers.
You may see long term 36 month contracts with lower rates than 12 month contracts. When this happens, the market is backwardated.
This can happen when the near term forecast calls for higher prices because of tight supply of electricity. The longer term outlook may be more favorable because of construction of generation plants that are scheduled to be on-line at some point in the future easing the supply concerns of the market.
Markets are strongly backwardated and have been since 2022.
Long-Term Contracts vs. Standard Service Offers from Utilities
In every deregulated electricity market (except Texas), utilities still offer a standard service offer. This is the rate you will pay if you do not sign up for electricity generation supply from an alternative electricity provider. Depending on where you live, this utility standard service offer may change monthly, quarterly, or every 6 months.
The benefit of selecting a long-term contract over the utility standard service offer is that you will lock in a fixed energy rate for one, two, or three years.
This rate may be a little higher than the standard service offer during the mild seasons. But, the standard service offer will increase during the high demand months, sometimes as much as 25%. With a long-term contract you’ve locked in a nice fixed rate to see you through.
Is a Short-Term or Long-Term Electricity Plan Better?
Most customers want to find the lowest rate possible regardless of the contract length. Others don’t want to bother finding a new electricity plan every few months and are willing to pay a little more to avoid it. Depending on where you fall on this spectrum, the best thing you can do is shop and compare.
Our recommendation? Go long. Energy demand is growing, and that will continue pushing prices up. Long term plans are the best bet against price inflation.
At ElectricityPlans.com, you’ll find a large variety of plans from many reputable electricity suppliers. Our search tools allow you to facet by plan length, provider, as well as unique plan features like free nights and weekends and 100% renewable energy electricity plans. You’re able to find an electricity plan with the exact plan length that works for you at the best electricity rate available.
Learn more about shopping for electricity by reading our guide The Definitive Guide to Shopping for Electricity in Texas.
