The long and short of energy contract duration…
When it comes to UK energy prices, it is not a case of ‘one size fits all’. Did you know that gas and electricity contracts can be offered in a wide variety of contract length, with the most common being standard one or two year duration. The shortest term for a larger consumer would typically be a month, with long term contracts running as long as 5+ years. Given such a wide variety of choice, how do you know which energy contract duration is right for you? Below you will find pros and cons associated with both shorter term and longer term fixed price contracts. Use these pointers to determine which duration is the best fit for your organisation. As with all decisions, please refer to specific T&Cs before signing up to any contract. If you are uncertain about the future at your site, it is recommended to pay particular attention to minimum and maximum take clauses and early termination clauses. As always, Direct Power can assist you to navigate through the options, ensuring you select a contract that is right for your needs.
Short term Pros:
- Often most competitive, the longer a contract the more exposure the supplier has to price volatility and uncertainty, i.e. more risk. A shorter term contract has less risk, so typically cheaper.
- Ideal if you are only responsible for a site short term, such as a Temporary Builders Supply, a Landlord who has taken back responsibility between tenant leases, or those who plan to relocate and do not want to be subject to early termination penalties. Refer to the T&C of your contract before signing if you plan to move in the near term, not all suppliers have early termination penalties, Direct Power can advise.
- If you have a contract renewal in the first part of the year, opting for a shorter term contract results in a greater weighting of summer to winter months in the contract, and typically cheaper prices. This is a one-time solution to lowering your costs. e.g. with an April 1st renewal date, a six month contract would cover 01/04 – 30/09, pure summer months enabling cheaper rates.
- Ideal for clients who struggle financially in the short term.
- Ideal for clients who struggle to pass credit checks, often suppliers can issue a 12 month price without the need for a security deposit, whereas longer term contracts may require a deposit.
- Ideal when prices are close to peak, which is easy to say, but hard to predict accurately without a crystal ball.
- If you are new to a site, or changing the way you use energy, a short term contract may allow you to ‘test’ your usage patterns before committing to a longer term deal.
Short term Cons:
- If you opt for a short term contract you significantly increase your administration workload, not only will you have to renegotiate rates more regularly, you will also have to adjust budget predictions, potentially set up new DDs etc.
- Due to a lack of consistency, short term contracts make budget planning and passing through of charges more labour intensive.
- Offer you less security and peace of mind.
- Some suppliers are not interested or willing to quote for shorter term contracts, you limit the number of bids for your business.
- If you expect usage to fall in the future, you will not get the prolonged scale of economy benefit associated with the larger consumption on the short term deal. Check for volume tolerance clauses before signing a contract if you anticipate major swings in consumption patterns, again Direct Power can assist with this.
- When you combine short term contracts with switches in supplier you complicate consumption tracking and reporting, thus increasing administration and reducing efficiency.
Long term Pros:
- Save you time, work and money. Put it simply, think about how much time you save by securing a single five year contract instead of five 12 month contracts, over the course of the five years it will save you days’ if not weeks’ worth of work.
- Enables accurate budget planning.
- More suppliers will quote for longer term deals, as your business becomes more appealing to win
- If energy represents a large proportion of your budget, a longer term deal enables you to fix your product/service prices, in turn giving your own clients peace of mind.
- Ideal for when prices are down, it is great to be able to lock in savings for the long term.
- A good choice for small consumers, if your consumption is minimal the actual £ difference between a 1 and 5 year deal will be minimal, whilst the savings on administration costs and time are indisputable, and often more than compensate for the slight premium of the longer term deal.
- If you are budget risk averse, a long term deal can give you peace of mind.
Long term Cons:
- Not the best option to secure when market prices are peaking.
- Check to see if suppliers have early termination clauses, some do, some don’t, Direct Power can advise you.
- If your usage pattern increases in the future, you will not get the scale of economy benefit until the next time you negotiate.
Long or short, we can help you determine the best fitting energy contract duration for your organisation. Do not get overwhelmed by the choices out there, it typically boils down to if you prefer peace of mind or not. If peace of mind is important to you, then a longer term deal is often your best bet. Direct Power can take on the grunt work of contract investigation, once Direct Power has tested the market for your organisation we will display the options for you and ensure you secure a ‘good fitting’ contract. Please get in touch and CONTACT US if we can answer any questions on your contract.