Clients are always asking me: “How long should I lock in a rate?” Is it better to lock shorter term or longer term?
In this week’s Two-Minute Tuesday, we’ll be discussing factors to take into consideration when choosing a term for your energy contract.
Common Energy Contract Term Lengths
When it comes to terms for your energy agreement, 12, 24, and 36 months are the most common options.
But they definitely aren’t the only options.
Most suppliers will readily go out 48-60 months on a fixed contract, and the top suppliers — with special approval — will go out for as far as 7-10 years for clients with really good credit.
Factors in Choosing an Energy Contract Term Length
So with all those options in mind, the major factors to take into consideration are:
- Market Conditions
- Internal Policies
- Market Timing
1) Market Conditions
When we say “market conditions,” we aren’t just talking about pricing today. Market volatility and macroeconomics also play key roles over the long term.
When market prices are high, you don’t want to guarantee that you have a very high rate for a long time. That’s a good time to look shorter term.
When prices are relatively low — and notably lower than what you’ve been paying in the past — those are times that you’d want to look out longer term.
What constitutes longer term and shorter term for you may vary based on your organization’s internal policies, which is the next factor to look at.
2) Internal Policies
Some examples of how internal policies can affect the decision of how far out to lock are:
- Specific term limits, i.e. you can’t enter into an agreement beyond a 36-month term.
- How far out you can commit
- Individual authorization limitations, where it wouldn’t be practical to go ahead and get additional authorization from a higher-up in the organization beyond a certain term length.
3) Market Timing
It’s important to allow ample time to monitor the market. Clients who see the best results over the longer term generally stay 9-12 months ahead of their contract termination date when making these decisions.
What does that mean for the length of the agreement? Well, any contract that expires within 12 months really doesn’t allow much time for you to go out and monitor the market and get the best results.
In short, when deciding how long you should lock in, take all of these factors into consideration to make the best choice for your organization.
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