How Long Should a Business Energy Contract Be?

Contract Length Is a Market Decision, Not a Default. Most Businesses Never Treat It That Way.

When businesses renew their energy contracts, the question of how long to fix for is rarely asked with the rigour it deserves. Most businesses accept whatever term their broker or supplier recommends — typically 12 months for smaller consumers and 24 months for larger ones — without understanding why that term was recommended or whether a different length would produce a better outcome given the current state of the forward market.

Contract length is not a preference question. It is a market question. The correct term at any given renewal is a function of the forward curve structure, the level of geopolitical risk premium embedded in prices, the business’s own risk tolerance and budget certainty requirements, and the frequency with which the business is willing to manage renewals. Each of these variables changes over time — and the optimal contract length changes with them.

What Fixing for Longer Actually Means

A business energy contract fixes your unit rate for the duration of the term. Fixing for 24 months means your rate is locked for two years. Fixing for 12 months means it is locked for one year, after which you return to the market and renew again.

The financial case for a longer contract depends on one critical comparison: is the 24-month forward price lower than, equal to, or higher than the 12-month forward price?

If the 24-month forward price is lower than the 12-month price (backwardation — the market expects prices to fall), a longer contract captures the lower forward rate for longer. This is a genuine financial argument for fixing for 24 months.

If the 24-month forward price is higher than the 12-month price (contango — the market expects prices to rise), fixing for 24 months locks in a higher rate for longer than necessary. In this scenario, a 12-month contract with a return to market at expiry is likely to produce a better total cost outcome if the market’s expectation of rising prices doesn’t materialise — or a worse outcome if it does.

If the curve is flat, the financial argument between 12 and 24 months is less decisive and other factors — management simplicity, renewal frequency preference, broker commission economics — become the deciding variables.

The 12-Month Contract: When It Makes Sense

A 12-month fixed contract is appropriate when:

• The forward curve is flat to contango. The market is not signalling a strong incentive to lock in longer. Shorter fixes preserve the option to re-contract in a potentially better window 12 months from now.
• Market uncertainty is high. When the range of possible future price outcomes is wide — elevated geopolitical risk, uncertain storage trajectory, potential supply developments in multiple directions — shorter contracts reduce the risk of being locked in at a price that proves significantly above the eventual market level.
• The business has appetite for active management. A 12-month contract requires annual renewal attention. For businesses with a broker managing the process proactively, this is not a burden. For businesses with passive energy management, it increases the risk of missing renewal deadlines.
• Significant operational changes are anticipated. A business planning to move premises, significantly expand, or change its consumption profile in the next 12–18 months may not want to lock in a contract that doesn’t reflect future consumption reality.

The 24-Month Contract: When It Makes Sense

A 24-month fixed contract is appropriate when:

• The forward curve is in backwardation. Near-term prices are higher than forward prices, creating a genuine financial incentive to fix for longer at the lower forward rate.
• The business needs budget certainty over multiple planning periods. Hospitality businesses, care homes, schools, and any organisation that budgets annually on fixed costs benefits from knowing their energy overhead for two years rather than one. The management simplicity is worth the modest premium.
• The business has struggled to manage renewals proactively. A 24-month contract cuts the number of renewal cycles in half. For businesses where energy management is a periodic rather than continuous activity, reducing renewal frequency reduces the risk of auto-renewal.
• A significant capital investment has just been made. A business that has just signed a long-term lease, invested in new equipment, or taken on new premises benefits from having predictable energy overhead costs against which to model the investment return.

The 36-Month Contract: Use With Care

36-month fixed contracts were common during the low-price era before 2021, when the financial risk of being locked in for longer was modest and the management simplicity argument was compelling. Post-crisis, with prices more volatile and the forward curve less predictable, 36-month commitments carry more risk.

The specific concern: at 36 months, the probability that market conditions change materially during the contract period is higher than at 12 or 24 months. A business that locked in a 36-month contract at or near the 2022 price peak found itself committed to above-market rates for three years with early termination costs that made exit uneconomic. The same risk, in the opposite direction, applies to any 36-month contract locked at what proves to be a cyclical high.

For most SMEs, 36-month contracts should be reserved for specific circumstances: very large consumers where the volume pricing premium is significant, businesses with an absolute requirement for multi-year cost certainty, or periods where the forward curve structure makes locking in for 36 months genuinely compelling on a total cost basis.

The Commission Dimension

A longer contract generates more commission for the energy broker. A 24-month contract at the same pence-per-kWh commission rate produces twice the total commission of a 12-month contract. This creates a structural incentive for brokers to recommend longer contracts that is independent of what is in the client’s best interest.

At Telnergy, our commission is fixed per deal regardless of contract length. We earn the same whether we recommend 12 months or 24 months. Our contract length recommendation is therefore not influenced by our own income — which is the condition under which genuinely independent advice on contract length is possible.

The Practical Answer

For most UK SMEs in the current market environment, the starting position is a 12–24 month contract, with the final decision driven by the forward curve shape at the time of renewal, the business’s budget certainty requirements, and their willingness to manage renewals annually. We assess this individually for every client and explain the reasoning behind the specific recommendation.

If your broker has recommended a contract length without explaining the market rationale, ask why. The answer should be specific to your situation and the current market — not a generic policy.

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Telnergy Limited • Independent Energy Consultants since 2002 • Ofgem TPI Registered • Christchurch, Dorset