Back to News

Short-term vs long-term energy contracts: How to decide which is best for your business

21 December 2023

Your electricity procurement can have a substantial impact on your business’s bottom line, which means there’s a lot to consider when it’s time to sign a new contract. One crucial factor to examine is contract length. Is a short-term or long-term contract better for your situation? The answer depends on your company’s priorities, risk tolerance, and future plans. Choosing the most suitable contract now can help you save money in the long run or lock you into a less-than-ideal situation. Let’s look at short-term and long-term energy contracts to help you decide which will be most beneficial for your business.

Short vs. long

What is considered short- or long-term? Typically, any contract that lasts for less than a year is short-term. Standard short-term energy contract offerings are three-month, six-month, or individual month-to-month commitments.

Contracts that span 12 months or more are long-term contracts. Common term lengths in this category are 12, 24, or 36 months.

Advantages of a short-term energy contract

  • Benefit from market trends
  • When you’ve only committed to paying a specific price for a few months, you can better take advantage of market rate drops. If you sign a 12-month contract and market prices drop, you must pay a higher price than current rates until the end of that term. If you’ve only committed to three or six months, you are less likely to miss out on dips in electricity rates.

  • Increased flexibility
  • Short-term plans allow you to be more nimble. Perhaps you’ve increased your production capacity, or maybe you’ve changed the hours during which you use the bulk of your electricity. Either of those things could change which contract is best for you. Being in a short-term contract means little waiting before you can optimize your energy contract for your shifting situation. If your company’s energy needs change, you can change your energy procurement plans accordingly without waiting for the end of a long contract. You can even switch energy providers entirely, if you’re not locked in long-term.

Disadvantages of a short-term energy contract

  • Suffer from market trends
  • The ability to benefit from market trends is an advantage of short-term contracts. Unfortunately, susceptibility to market trends goes both ways. Just as you can benefit by signing a new contract when prices drop, you’ll have to lock in those higher prices at your next renewal if prices rise. Short-term electricity contracts leave you more open to market fluctuations, whether up or down.

  • Budget uncertainty
  • If you don’t know your electricity rates in three or six months, creating an accurate budget is impossible. If your company has tight or seasonal cash flow, that uncertainty can cause hardships when your forecasted expenses are vastly different from your actual costs.

Advantages of a long-term contract

  • Stability
  • Committing to a contract of a year or several years means your rates are stable. This lack of variability also provides predictability, which can be especially useful for businesses that need to project future costs accurately.

  • Long-term savings
  • A long-term commitment can mean long-term savings. If you sign a contract when rates are low, you keep that desirable rate for the duration of your contract. If that contract is only three months, you have to hope that rates haven’t increased when those three months are over. If that contract is 24 months, you’ve bought yourself the right to pay a low rate for two years, even if it is well less than the market value a year into your contract.

  • Less time spent researching
  • You should thoroughly research available options every time you sign a new energy contract. That means exploring every electricity company that services your area and looking into each of their contact options. That’s a lot of time and energy taken away from your company’s daily operations. If you sign a long-term contract, you don’t need to weigh your options again for a year or more. A shorter contract means that as soon as you sign it, it’s almost time to start the research again.

    You can mitigate this issue by working with an energy management consultant who has already done this research and can quickly walk you through your options. However, a long-term contract will always mean less time spent deciding on the best plan for your energy procurement needs.

Disadvantages of a long-term energy contract

  • Inability to capitalize on market decreases
  • Locking in a low rate for a year or several years can be great for your company. But there’s no way to know what will happen with future rates. If they increase, you’ll pat yourself on the back for having the forethought to lock in low rates long-term. If rates decrease, however, you can do nothing about that until your contract ends, meaning you could lose out on savings. Because you’ve committed for a more extended period, you avoid increases but may also miss out on market decreases.

  • More commitment
  • If you are unhappy with your utility company’s level of service or reliability, a long-term contract prevents you from doing much about it. As long as they meet the contract terms, you are stuck with them until the contract expires unless you pay penalty fees.

Evaluating your options

Short-term and long-term energy contracts each have their advantages and disadvantages. What’s best for your company depends on your priorities and situation. If you need help evaluating available options, working with an energy consultant can remove much of the stress, confusion, and pressure from this vital decision. They can answer your questions about various options, help you understand your needs and how a contract’s terms pair with those, and understand the pros and cons of each potential electricity contract.

Others articles you might like

7 Factors to Consider When Choosing an Energy Provider for Your Business

From ski lodges and farming operations to retail stores and manufacturing companies, energy costs are a significant line item on your profit...

20 June 2024

Understanding the differences: Residential vs commercial energy contracts

Energy is essential to the operation of both businesses and residential homes throughout Canada and the rest of the world. But, there are ma...

4 June 2024

LED retrofits: The essential guide for businesses

Ever since Thomas Edison flipped the switch on the first light bulb, innovators have been making brighter and more efficient lights. Recentl...

23 May 2024

Start taking charge of your energy today!

Get a free quote