What length energy contracts provide best value and why?
The timing of when to commit to your energy contract is in itself a challenge. Particularly when prices are high as they are now, when it may be that in a few weeks time they will fall. This is often the key factor that customers consider when deciding their energy contracts.
However, another factor can be the length of the contract. Energy prices vary across time, with energy being traded up to around 5 years ahead of the current date.
At the moment a unit of energy bought now for delivery in 2-3 years time is cheaper than one that would be delivered in a years time.
Therefore, the energy cost for a 12 month contract will be more expensive than a 24 or 36 month contract for deals starting in October.
Don’t forget that if you have a fully inclusive contract then other cost elements will be built into the price and these too vary across time.
At the moment for contracts starting in October the energy costs are cheapest for a 3 year deal vs a 24 month or 12 month contract. For contracts starting in April a 24 month contract is cheapest. This is because further out along the energy curve prices increase again.
The reason why energy prices increase further along the curve is mainly due to risk i.e. the uncertainty about available supply. However, for some time now 2 and 3 year prices have been cheaper than shorter term prices. This is known as backwardation. Backwardation reflects short term factors affecting prices in the immediate and near future, this generally involves immediate infrastructure and supply concerns or currency exchange rates.