Bad Energy Contracts Can Happen to Good People

energy industry insight

Not all energy supplier contracts are the same – and may even vary contract to contract within the same supplier. As your company’s energy buyer, it’s important you’re aware of what can be negotiated, and what you’re ultimately signing.

Key energy contract items to watch for:

Swing Provisions

  • Energy contracts will typically include a stated swing or bandwidth variation percentage. This percentage is the amount of electricity or gas you are allowed to consume above or below your expected usage amount. Should your consumption go above or below the allotted swing, penalty charges can be assessed. Depending on your type of business, the electricity or gas you consume may vary, requiring you to need a higher swing percentage, or even full swing (100%). As part of our procurement process, we analyze your swing requirements and negotiate your swing price trade-off terms to help you get the lowest costs with acceptable risk.

Change in Law Clauses and Regulatory Changes

  • Should there be a change in law impacting energy rates, a supplier may have the right to pass through any incremental costs on to you. While the change in law is a consistent feature of many supplier contracts, we have seen varying degrees of what suppliers constitute as changes in law. We make sure you are aware of contract language differences and convey to you our experience with how suppliers enforce their change in law provisions. We make recommendations to you regarding market ranges and help you to understand how the market is enforcing certain change-in-law contract provisions, so you can reduce your risk.

Treatment of Ancillaries

  • Not all suppliers price ancillary costs the same way. Usource knows from experience how each supplier approaches pricing of ancillary costs. Some suppliers will offer a fixed price, with the caveat that if your Capacity Tag (your peak demand during the peak system hour) changes, they will change their price to you based on the differential. This essentially puts the capacity risk back on you – despite the fact that your price is ‘fixed’. An energy consultancy like Usource would identify those suppliers that would structure a contract in this manner and either help you get the contract language changed to protect you, or advise you of the out-of-market risks you may be taking and if the price is worth it.

Automatic Renewal and Contract Rollover Provisions

  • Many supplier contracts have an automatic renewal provision, putting you in the position of having to actively manage the renewal with that supplier or drop service with them. Often times, if you don’t take action, you will renew at a rollover rate which may be loosely defined in your contract. Different suppliers take different approaches with rollover rates, and in some cases, you can negotiate the removal of automatic renewal provisions and/or define them more specifically to reflect market prices. Moreover, when you work with an energy consultant, they are actively monitoring your contract renewal dates and contacting you well in advance to set up your next energy supply bid to ensure you get the most up-to-date competitive offers.

Operational Flow Orders (OFOs)

  • OFOs can be called by Pipelines or Utility Companies during times of stress on their system. There are both warm weather OFOs and cold weather OFOs. The OFO process is designed to either bring more gas to a pooling point or reduce the amount of gas at a point, in order to help balance the system. The last thing you want to find out is that you paid incrementally for some additional swing provision, yet if there is an OFO, the supplier takes away the swing clause. An energy consultant can help you understand how gas suppliers manage swing in the event of an OFO, and may be able to help you clarify this provision in the contract, or recommend contract language changes to make sure you keep your swing benefits.

Not all supplier contracts are the same. As a trusted energy consultant, Usource leverages its 20 years of operating history to thoroughly understand energy suppliers and market behaviors and Usource knows how suppliers apply their contracts. Contact us today and let us put our market experience and knowledge to work for you.

 

The opinions and services discussed are for general informational purposes only and should not be construed as, nor does Usource provide legal advice.


About the Author

Tom Dyer is Sr. Director, Procurement & Analysis for Usource. Tom has over 16 years of experience in the energy markets, including working for two of the largest energy suppliers on the East Coast.

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