Energy bandwidth clauses are found in fixed-rate energy supply contracts between suppliers and customers. 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 in which they anticipate the customer to use over the fixed-rate term. 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.