AEC Market Education - Module #18
How Long Should Your Electricity Contract Be?
A common question, and one you will likely have to justify later. Work it against the framework below and you commit on reasoning you can point to, not instinct you may regret.
A supply contract is a purchase made in advance. You are buying a set number of kilowatt-hours for a set stretch of time, at a price agreed today for power delivered later. A longer contract turns more of an unknown future into a number you can write in a budget. That certainty is worth something, and it has a cost: you give up the chance to change your mind as the market moves. The wish behind most term questions is the lowest possible price with the freedom to walk whenever it suits you. No supplier hands that combination out for free, because the freedom itself is a thing of value, and they are not in the business of giving value away.
What you are actually choosing between
The common belief is that a longer term costs more, as if you were paying a fee for peace of mind. That is not how the price is set. The number attached to any term comes from the shape of the forward curve, which is the market's running guess at what power will cost in each month ahead. Some months trade higher than today, some lower, and a term is just the average of the months it covers.
When the near months sit above the far months, the curve is backwardated, and a longer term can price below a shorter one. When the near months sit below the far months, the curve is in contango, and the longer term prices above. So a longer commitment does not promise a bigger number. What it reliably buys is a wider stretch of budget you no longer have to worry about.
These curves show the relationship rather than any price level. The vertical scale is left unlabeled on purpose, since the shape is what carries the lesson and the real numbers move with the market. How a given strip gets built, and why June tends to anchor it, is covered in Why June Anchors the Strip.
That reframes the whole decision. The real trade sits between certainty and flexibility, where flexibility means the ability to go back to the market and re-decide as conditions change. What a longer term costs you is that flexibility. The price premium people expect is not really the thing in play. Both certainty and flexibility have value. The right answer depends on which one your situation needs more, and on where the curve happens to sit the day you price. If you want the fuller treatment of how the price itself gets built, that lives in We Just Want The Lowest Price.
Why leaving a supply contract is not like canceling insurance
People often describe a fixed contract as insurance against a rising market, and the instinct is close to right. The seam shows up when you try to get out. Cancel a car policy and you hand it back at almost no cost, because the insurer never went out and bought anything shaped to your specific risk. It was a bet, and bets are easy to unwind.
A supply agreement is a bought position, not a bet held loosely. When you sign, the retail provider goes into the wholesale market and locks in power sized to your usage pattern for the length of your term. That purchase is real, and it is done in your name whether you stay or not. You can still leave in the middle. The difference is that leaving triggers a cost, usually written as liquidated damages in language most buyers never read closely, and sometimes the contract blocks an early exit outright.
None of this means you are trapped. An exit exists. It just carries a price, that price is often buried in the contract, and you want to know the number before you sign rather than after you need it.
The "blend and extend," and its fine print
Here is the pitch you may hear when you worry about locking in too long. Sign the long term now, and if prices fall later, you can blend your rate down and stretch the deal out, capturing the lower market without penalty. Told that way, it sounds like a long commitment with an escape hatch built in. The pitch leaves four things out.
There is a deeper problem than the four omissions. A blend only ever helps in one direction. When the market falls, you can ask to blend down. When it rises, nothing comes your way, because the provider has no reason to blend your rate up and you would not want them to. The flexibility runs one way, it depends on the provider agreeing, it is gated by how far along you are, and it gets repriced when you use it. Whatever real optionality is left after all that is a small fraction of what the pitch implied.
How to weigh the choice for your own situation
There is no term length that is correct in general. The sensible length for you falls out of four things about your business and the market you happen to be buying into. Walk through all four before you let any quoted number pull you one way or the other.
One more filter sits underneath all four. Most of the advice floating around this decision is scattered, a fair amount of it is wrong, and much of it tends to line up with how the person giving it gets paid. Weigh the source the same way you weigh the market.
Find the questions that fit your situation
This will not tell you to sign for any particular number of months, because no tool can say that reliably. The right length depends on the curve on the day you price, and that gets decided deal by deal. What this does is weigh what you tell it and surface two things: the consideration that should carry the most weight for you, and the exact questions to put to whoever quotes you.
The length is an output, not a starting point
Decide how much budget certainty you need and how much room to re-decide you want to keep. Read the curve on the day you go to market. Then let the term fall out of those two things, rather than picking a number first and reasoning backward. A longer term is simply a bigger hedge, and hedging on purpose is covered in Market Timing and Hedging. When you go to market matters as much as how long you commit, and that timing question lives in Renewal Timing Windows.
Want the length worked out against your actual load?
We price the available terms off the same curve on the same day, show you the shape rather than a single headline number, and read it against where your business sits. You see the tradeoff plainly and decide from there.
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