Energy Contract Language 101

When you sign up for a contract with an energy supplier, you’re committing to buy their energy at a set price for a certain period of time. You’ll usually be able to choose between a fixed rate or variable rate plan, depending on what works best for your household or business.

Fixed-Rate Plans

It’s important to realize that the price per kilowatt hour (kWh) on fixed-rate plans is locked in for the duration of your contract. So if the market price goes up, your rate per kWh stays the same; and if it goes down, your rate stays the same. There are many nuances of a fixed rate plan such as bandwidth, fixed price components, auto-renewal clauses and more. We will detail these below.

Variable-Rate Plans

With variable rates, you pay more when demand is high and less when demand is low. This means that when the market goes up, so does your bill. And, when the market comes down, your bill is also less.

The important thing here is knowing how much energy usage has changed from year to year so that you can calculate whether or not switching from one type of plan will save money long term!

Read more about choosing the right product for your business here.

Fixed Rate Contract Language

Whether you are a commercial customer or an energy broker advising customers, it is important to understand the details of a fixed-rate energy supply contract. When you are aware of the nuances of an energy supply agreement, you can better advise your customers and become a more successful energy broker.

Swing Clauses

Most fixed-rate energy supply contracts have a swing, or bandwidth clause (read more on bandwidth clauses here). This section of the contract details how much or how little energy a customer can use and still pay the same fixed price per kWh.

Since retail energy suppliers are pre-purchasing energy to fulfill their fixed-rate obligations, they need to forecast the correct amount of energy to purchase.

Too Little Usage

If a customer uses too little energy over the course of the agreement, then the supplier could be left with excess energy it has already paid for. If the market is lower at that point, the supplier could lose money selling the excess energy back to the market.

Too Much Usage

On the other hand, when a customer uses too much energy over the term of the agreement, then the supplier might not have enough energy to meet its fixed-rate obligations. Remember, the supplier is purchasing a certain amount of energy before the contract starts, at the then-market price. When the customer uses too much, the supplier is forced to purchase the excess usage on the open market. If market prices are higher than the fixed rate on the contract, the supplier could lose money.

The Bottom Line

Suppliers put usage tolerance clauses, also known as bandwidth or swing, in their fixed-rate agreements to protect themselves from these situations. Customers are forced to pay market prices or penalties when they use too much or too little energy. See the chart below detailing how a 25% bandwidth clause might work:

Fixed Components

Another key element of a fixed-rate energy supply contract is to understand what price components are fixed and what price components are subject to change.

Utility Distribution

If you have been selling energy for some time, you already know that energy supply is a separate charge than utility distribution. However, it is important to remember that some of your customers might not be aware of this fact. Explain to them the difference between supply and delivery, and how the fixed-rate components of the supplier agreement only apply to the supply portion of their bill.

Energy

The first and most important component of a fixed-rate is the physical energy commodity. Whether you are entering into a fixed electricity or natural gas agreement, the first element of the fixed rate is the actual energy.

Transmission / Transport / Capacity

Some other critical elements of the electricity or natural gas supply rate are transmission, transport, and capacity. These are the charges to transport natural gas across interstate pipelines, transmit power across national transmission networks, and pay electricity generators for stand-by capacity to meet the demand of customers.
These three components are other major elements of a fixed-rate that should be included in the total price.

Be Aware
Some things to be aware of when reading the fixed price components in an energy supply contract:

• Electricity: pass-through clauses that allow suppliers to pass-through changes in fixed price components, such as transmission and capacity
• Natural Gas: it is important to know if your fixed rate is the total price delivered to your facility (“burner tip”) or delivered to your region (“city gate”)

Auto-Renewal Clauses

Another key clause to be on the lookout for is the auto-renewal clause. Some suppliers will include an auto-renewal clause, particularly in matrix contracts, that allows them to renew the customer for a specific term, or at a specific price.

Auto-renewals can become a nightmare if the customer, or broker, is unaware of the clause. When the customer attempts to sign up with a different supplier at the end of the contract, the original supplier can charge an Early Termination Fee for leaving the contract.

Many customers and brokers are dumbfounded at this point thinking that the contract was expired. They come to learn that the customer is now on a new contract due to the auto-renewal contract language.

Pro Tip: Many retail energy suppliers are willing to eliminate auto-renewal clauses for the right broker partners. As a customer, it is important to align yourself with a reputable energy broker who can help you negotiate favorable contract terms

Need Help?

Whether you are a customer looking for help negotiating better contract terms, or a broker looking for better sales support, we can help!

As one of the nation’s leading energy brokerage firms, we help our customers find the best energy supply contracts that are right for their individual usage profiles. In addition, we have a team of energy industry experts to support the sales efforts of our partners.