Energy bandwidth clauses are found in fixed-rate energy supply contracts between suppliers and customers. Bandwidth energy contract language exists in order to protect retail energy suppliers from fluctuations in the energy market.
When suppliers offer a fixed rate to a commercial customer, they are anticipating that customer’s usage based on historical data. To offer fixed rates, suppliers pre-purchase electricity or natural gas in the futures market in order to hedge their costs. To do so, energy suppliers must commit to certain volumes of energy which they anticipate the customer to use over the fixed-rate term.
If a customer happens to use more energy than expected, the supplier needs to purchase additional energy at the then market price. If that price differs significantly from the original contract price, the supplier loses money.
On the other hand, if the customer does not use the same amount of energy that was expected, the additional energy that the supplier pre-purchased gets sold back to the market at the then current price for a loss or profit.
In an effort to protect themselves from a variance in customer usage, suppliers sometimes implement bandwidth clauses into contracts that allow for a certain percentage of usage variance. Here is an example below…
The example above represents a 25% bandwidth allotment where the customer can use 25% more than their historical usage (or 25% less) and still pay the same fixed rate for energy. That is, not be penalized for excessive usage, or a lack thereof.
- The building in the middle represents the customer’s total energy consumption for the previous 12-month period.
- The building on the right represents the total amount of energy consumption the customer can use under the fixed-rate term and not be penalized.
- The building on the left represents the least amount of energy consumption the customer can use and not be penalized.
In this bandwidth example, if the customer used more than 25% of their allotment, the energy supplier might charge them a different rate for the excess usage. And, if they use less, the energy supplier might pass through any additional costs incurred from liquidating the pre-purchased energy. Let’s explore more about how energy bandwidth is enforced below.