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.
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.
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.
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:
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.
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.
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.
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”)