Choosing Energy Suppliers: Deciphering Contractual Risk

Choosing Energy Suppliers: Deciphering Contractual Risk


For companies striving to outperform their competitors, effectively managing energy expenses plays an important role. While securing the most competitive price is common knowledge and a primary objective, unforeseen contractual liabilities can significantly influence these expenses. Vigilance in identifying and addressing contractual risks can grant your business a sustained competitive advantage.

  • The focus often falls on the rate per kWh, yet contractual uncertainties can modify this initially agreed-upon rate.
  • While energy supply contracts may seem uniform, distinctions in their terms and conditions distinguish an excellent contract from a merely good one.
  • The risks ingrained within the contract have the potential to adjust your rate as time progresses.

The image above highlights a buyer's exposure to a holdover rate established after the expiration date of the initial agreement. The adjusted rate is $39.999 cents/kWh, a 300% markup from the initial contracted rate and nowhere close to actual market conditions.

In deregulated markets, consumers can switch from utility tariffs to third-party energy suppliers for better cost management and often lower rates. However, these deals come with hidden contractual risks. Thoroughly reviewing contracts is important to avoid unexpected problems.
Contractual risk lies in the fine print of energy contracts, including terms like bandwidth, material change, capacity, and holdover rate. These allow suppliers to modify rates over time, potentially changing a fixed rate into something higher. Understanding these contract terms is key to anticipating their impact on your bills.

To comprehend how these variations can impact your monthly bills, it's important to dissect the primary and relevant sections of an energy supplier’s agreement:

Bandwidth Provisions: Bandwidth is essentially the tolerance band for deviations in an end user's estimated versus actual monthly usage. Higher bandwidth percentages insulates the buyer from additional charges being levied for using more energy that initially expected.

Material Change Provisions: Unlike usage variances driven by normal operating conditions (like weather variations), material changes entail substantial modifications in usage patterns, such as adding an overnight shift to plant operations or expanding a buildings square footage, potentially leading suppliers to adjust rates to account for the "material" increase in usage.

Capacity Provisions: Besides the commodity itself, capacity, a component in some, but not all markets constitutes a significant portion of the fixed all-in cost. It's calculated based on a business's consumption during peak demand times and the associated market's capacity clearing price.  Uncertainty in future demand and potentially unknown clearing prices pose risk to energy suppliers and may result in rate adjustments based on how the language is written in the agreement.

Holdover Rate: A rate that activates after the contract's expiration date, varying across suppliers and potentially subjecting customers to market-based rates, adjusted fixed rates, or even utility tariff rates, all with the potential to affect energy budgets adversely.

Avoiding contractual risk involves proactive steps. Initiating a discussion with us should be step one toward enhancing your overall strategy. Working exclusively with reputable energy suppliers, our transparent approach unveils diverse pricing structures while pinpointing and elucidating potential contractual risks beforehand. Moreover, we continuously monitor energy markets and collaborate with clients to secure purchases during opportune market positions, serving as a trusted fiduciary.

Contact us for more information.