short or long term contracts

Short-term versus long-term energy contract, what’s best for me?

It doesn’t matter how knowledgeable you are on the energy sector, choosing an energy contract that best fits your business model is always going to be a difficult decision.

We’ve spoken previously about the kind of deals available, but once you’ve decided what type of contract is right for you, the next big question is: How long do I sign it for?

For anyone that’s read one of our posts before, you’ll know the right thing to do regarding business energy is different for every business.

The energy market has always been temperamental, and the complications Brexit has thrown into the mix has only further convoluted matters. The instability brought on by the current political climate has only worked to create more confusion amongst businesses about what deal is best for their long-term objectives.

To help provide some insight into what’s best for you, in the following piece, we’ll address some of the most common queries we receive from businesses and provide you with a clear vision of where you need to go moving forward:

The fixed price always seems higher for my long-term energy contract, so how can they work out more cost-effective?

Understanding why long-term contracts often work out cheaper requires you to look at the bigger picture. A longer-term fixed rate contract should always be looked at as a “price guarantee”.

Typically, the cost in your first year will always be cheaper (if you aren’t using a consultant) on a short-term contract compared to a 3- or 5-year deal as suppliers will always build risk into a long-term energy contract. But over the course of time, you become further susceptible to the changing environment.

The following example is a great visual representation of such a deal.  In the below table, we’ve compared a five-year fixed rate electricity contract we negotiated in 2014 (for an SME client of ours) with the UK’s average electricity price for each of the five years.

Energy Contract

Source: UK Government Department for Business, Energy and Industrial Strategy statistics.

Between 2014 and 2018, the price of electricity had risen by 12% (2016 to 2018 was a particularly volatile period which saw prices jump by 21%), however, due to the nature of our client’s contract they were protected throughout from any increases in price.

Would a short-term energy contract be better if there’s a chance I might move premises?

This really depends on a combination of your cancellation fee and energy usage. If you’re a small consumer of energy and you have a high cancellation fee, then it would be advisable to seek out a short-term energy contract. If you plan on moving on in the next twelve months, then it probably wouldn’t be advisable to sign a five-year deal.

However, it’s worth considering that any energy supplier worth its salt is likely to want to keep your business when you move premises, especially if you’re moving to a larger building. Quite often, with a bit of negotiating (normally via a consultant), a cancellation fee can be waived, and competitive rates acquired for your new location.

How can I best protect my business from a post-Brexit price hike?

It’s a volatile and unpredictable market, not helped by political events on the horizon such as Brexit. Experts like GAS are frequently asked where the market is going post-Brexit and, truth be told, nobody in the industry really knows.

One thing we do know is that as it stands, the UK imports around 40% of all the energy it uses, and currently has gas pipelines (or gas interconnectors) with three EU states: Ireland, the Netherlands and Belgium. With the future likelihood of tariff increases (especially in the case of no-deal) Energy UK, the trade association for the British energy industry, and a House of Lords committee, have both predicted price increases.

So, what’s your best option? If you’re concerned about rising prices then remember what we highlighted earlier, a long-term energy contract should be looked at like a “price guarantee”. The average cost of energy can go up as much as it wants, but if you have a long-term fixed rate contract, your price will remain the same.

This can provide a greater ability to forecast expenditure and give you some control and certainty post-Brexit…at least with regards to energy expenditure.

Can GAS help us?

Certainly.

We’re experts in negotiating and acquiring the best deal for you. We understand how daunting the prospect of dealing with large energy suppliers can be and that’s why we’re here, to do the hard work for you.

We’ll analyse your current business setup and contracts and present you with the most competitive (and bespoke) rates on the market, as well as chatting through why a particular deal would be the best fit.

To find out more, call us today on 0800 130 3514 or complete our contact form and we’ll be in touch.

 

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