The Fix – isn’t Always a Fixed-Price Contract

Don’t we all want to go into something, knowing what to expect? Doesn’t the name “fixed-price” sound pretty predictable? The truth is, when you contract for a fixed electricity price you’re locking in the majority of price exposure, but real price risk still remains.

YOUR ELECTRICITY SUPPLY PRICE IS COMPRISED OF SEVERAL COST COMPONENTS:

SWING PROVISIONS

The largest part of your electricity supply price is the energy cost which is largely driven by the cost of generation fuels like natural gas.  Fortunately, it’s relatively straightforward for a supplier to hedge the energy costs.

The big issue for a supplier is to hedge the right amount of electricity given what you are predicted to use over the contract term. Suppliers will manage this risk by building in a premium to cover usage variations, and by limiting how much variation they will allow you to have. This is called a ‘swing provision’ in your supply contract. One way for you to get charges that exceed your fixed contract price, is to use more energy than is covered in your contact swing provision. If the supplier is forced to buy higher-priced electricity to serve your needs outside of your swing, then the supplier may end up passing that higher cost on to you.

HOW DO WE CALCULATE SWING PROVISIONS?

To put it simply –

  • Your facility’s contracted electricity usage: 10,000,000 kWh
  • Contract Swing Provision: 10%
  • Your facility’s allowed maximum electricity usage: 11,000,000

HOW IS THIS COST PASSED ONTO YOU?

To manage the risk of other price components, suppliers will use pass-through language in their contracts. Here are two ways they may do this:

  1. They may look to pass through the actual cost to you from the start by leaving the specific component out of the fixed price.
  2. They may make a best estimate of what they believe the cost will be and include it in the fixed price, but contractually allow the pass-through of costs in excess of the estimate.

Each supplier handles these issues differently through contractual provisions, such as ‘change in law’, ‘material adverse change’, and ‘price component adjustments’, etc. Not understanding your contract can leave you with unwanted surprises from pass-through and price adjustments.

WHAT YOU CAN DO TO AVOID SURPRISE PRICE INCREASES:

  • Compare contract provisions from supplier to supplier before contracting (they can differ dramatically!)
  • Pay attention to your bills and any notices you get from suppliers
  • Hold suppliers accountable for explaining the rationale for increases
  • Understand your contractual rights and your options

Many end-users don’t have the time or expertise to adequately do these things. As a client of Usource, we do these for you. If you are not a client yet, and you suspect you are getting adjustments to your price, contact us and we will review your contracts, identify areas of concern and make recommendations to mitigate current risk and avoid future pitfalls.


About the Author

Hillary Flanagan As the Senior Marketing Specialist, Hillary is responsible for developing B2B online and offline campaign strategies, analyzing marketing metrics and assisting the field Sales team in booking new business. Hillary has 5 years of experience in marketing and communications within the gas and electric utility industry

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