It’s no secret that the cost of electricity can vary widely from month to month.
Most electricity customers discover this firsthand if they have signed up for a month-to-month electricity plan which has a variable rate. There are price fluctuations that happen each month depending on factors such as customer demand (largely related to weather), and the available supply of electricity. To avoid these price swings, most residential electric customers choose a fixed rate electricity contract that locks in a favorable energy rate for a fixed length of time.
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.
Electricity contract term lengths vary and can be as short as 3 months or as long as 5 years. Most customers select contract terms between 6 months to 2 years. Learn about the benefits of the fixed rate contract and how to determine the best electricity contract length for you.
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 will be needed 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. The utility delivery charge, or TDSP fee, will be the same regardless of who supplies your power or what contract length you choose. The utility delivery charge pays for the poles, wires, and meters that service your home or business.
Short-Term Electricity Plans
Looking for a 3 month, 6 month, month-to-month or other short term electricity plan?
Short-term plans usually last less than a year, with six months being the most common length of time. 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. Texas REPs start offering really inexpensive 6 – 9 month electricity plans about October. Why? These shorter contract terms in October won’t cross the most expensive summer months. The providers secure cheap electricity in advance to service these contracts and pass the savings on to the customer. Buyer beware! Your contract could be timed to 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.
Signing up for a short-term electricity contract means that you will need to shop for electricity more frequently. Time flies! You could overlook your contract renewal date. If you happen to miss the deadline and don’t sign up for a new contract, your provider will move you into a default plan with a ‘Holdover rate’. This is a very expensive month-to-month variable rate electricity plan. A default plan can cost you hundreds of dollars in a bad market and be a nasty surprise.
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. Your Early Termination Fee will be waived if you provide proof of a move.
Long-Term Electricity Plans
Long-term plans allow you to lock in a certain rate for one or more years. If you sign the contract when electricity prices are low, you’ll get a bargain that lasts.
The rates for long-term electricity contracts depend largely on the forecast for the supply and demand for electricity.
The supply part of this projected forecast takes into consideration the status of generation assets (power plants). Are there any new generation facilities scheduled to come on-line in the future? Are there any power plants that may be shut down?
The demand part of the projected forecast looks at weather trends and population shifts. Are people moving to the area? What is the long-term weather outlook?
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.
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.
Moving and Long-Term Electricity Contracts
If you are unsure of how long you may be at your current residence, don’t let that stop you from signing an electricity contract. Each state has rules that prevent providers from charging an early termination fee if you move. All you need to do is let your provider know and give them your change of address.
Is a Short-Term or Long-Term Electricity Plan Better?
Unfortunately, there’s no simple answer to this question. It depends on the time of year you are shopping for an electricity plan and the part of the country you live in.
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.
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 military discount 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.