Short Term vs Long Term Energy Contracts: Which One and Why?

By 28 January 2019 General

The process of choosing an energy contract for your business can be quite daunting even for the most knowledgeable and confident of customers. One of the best recommendations is securing a long-term contract, this can be beneficial to business customers from both a financial and administrative point of view.

When a business customer approaches the energy market with a view to securing a new energy contract, it can seem like a minefield. There’s over 50 suppliers to choose from, a variety of different tariffs as well as different contract lengths. How does a business decide whether to go for a short term (1-2 year) or long term (3-5 year) contract?

We advise opting for a longer-term contract for many reasons…

With time, comes increases in price
Over the course of time, as with most things, energy prices tend to increase. We’ve seen prices increase dramatically in the last 10 years and from our vast experience, we predict this trend will continue.

This is further emphasised by the  Guardian

‘The price of electricity could double over the next two decades, according to forecasts published by the National Grid, the company responsible for keeping Britain’s lights on.

The current price of wholesale electricity is below £50 per megawatt hour but could soar to over £100 by 2035 under a “high case” example used in the Grid’s UK Future Energy Scenarios report.’

Gas vs Electricity

Let’s consider the difference between gas and electricity. When looking at electricity contracts, it’s not just as simple as opting for the longest-term contracts unfortunately. There are certain mitigating factors that need to be taken into consideration before making a decision on the length of contract you are going to opt for. Firstly, and probably the most discernible factor, the actual price needs to be taken into consideration. You still tend to pay a premium on longer-term contracts. It’s a tough decision to make, you have to compare and contrast, you have to take into account how much more you’ll be paying on a longer-term contract versus a shorter-term contract. Consider whether you think the expected price increases will negate the extra costs. It’s a gamble, there’s no exact science to it, but the premiums you pay on longer-term contracts are usually minimal and by the start of year three you’ll start to see the savings.

In reference to gas, when deciding what contract to opt for, it’s an easier decision to make. Most suppliers offer their most competitive prices on longer-term contracts. Electricity can be a little more complicated and volatile in comparison

Secondary factors to consider

As well as the initial and immediate factors to consider, there are also other secondary factors to take into account when deciding how long to fix your prices for:

  • Time at the property: How long will you be in the property for? It would be futile to fix an energy contract for 5 years if you’re planning on vacating the property within a year or two.
  • Transfer of business ownership: Whether there are any plans for the business to be taken over by another, essentially changing the responsibility of who pays the bills. This would mean any contracts that are in place would become null and void, again, it would be pointless agreeing to a longer-term contract.
  • New to the market: If you are a new business and unsure of what your consumption will be, then it would be prudent to opt for a one-year contract. When you revisit the market after a year, you’ll know what your annual consumption is and can, therefore, make a more informed decision.

Saving money, stability, what else?

Apart from a money saving opportunity and the stability of a long-term contract, there are two other main benefits of fixing your business energy rates for longer:

  • Administration: Reviewing your energy contracts can be a long and laborious task, especially if you procure your business energy contracts in house. Without the help of a third-party intermediary, dependant on the number of sites you have, it can be hard work. There are various tasks to be carried out; contracts and direct debit mandates to be signed, sourcing a supplier, contacting each one to obtain a quote, providing current energy data etc. If you fixed your prices for longer, it would mean these tasks would have to be undertaken every three to five years, as opposed to annually or biennially.
  • Budget certainty: If a business fixes their prices for three to five years it allows them to budget accordingly. It can give peace of mind, knowing that their price
    s won’t change for a longer period of time.

In conclusion, there are no set rules or guidelines when it comes to fixing your energy contracts. However, experience has taught us at Utility Team, that the benefits of a longer-term contract far outweigh the negatives. The volatility of energy markets means that you receive long term price protection, which is very important for the majority, if not all, businesses.

Here at Utility Team, we deal with all aspects of procurement for our clients. If you need assistance with your energy contracts, long or short term, we can help. Contact us to discuss your options: 02476 997901 or enquiries@utilityteam.co.uk

Article written by: Alex Rubboli, Senior Business Energy Consultant