When contracting for electricity there are many things to consider. What most of us look at first is what rate we will be contracting at. The contract rate is probably the most important item to consider. Other things to consider are the term length, the supplier and their credit worthiness and the contract terms. The pricing and term length comparison is transparent and easy to understand. Differences in the contract terms between suppliers isn’t always as clear. Sometimes the lowest rate may not be your best choice depending on the contract terms and your situation.
When reviewing a supplier’s contract there are a number of key areas the IRMA Energy Team considers. .
- Allowable Quantity Variance:
- Electric contract terms are generally either:
- full requirements, meaning the suppliers sell you everything you consume at the contract rate; or,
- a stated quantity contract whereby the contract identifies a stated monthly quantity which is sold at the contract rate. Any amount consumed that is less than the contract quantity is bought back by the supplier at a discounted market rate and any quantity consumed above the contract quantity being sold to you at the current market rate plus a premium. This is also known as “cashout.”
- IRMA generally recommends that members enter into the first option, a full requirements contract.
- Some full requirements contracts have Allowable Quantity Variances. Meaning if your usage varies by a stated percentage from your historical usage for the same time period, the supplier can use cashout pricing on the difference in usage. We always like to a look for a minimum of 20% variance before cashout kicks in.
- Electric contract terms are generally either:
- Early Termination Fees (ETF)
- Early termination fees are charged if you break your electricity contract with a supplier prior to the end of the contract term.
- Some contracts will charge a stated amount per MWh of remaining estimated usage associated with the contract. As an example, the ETF amount per MWh is $25 and based on historical usage the supplier estimated you should have used 100 MWhs from the time you terminated the contract early until the end of the contract term, the EFT would be $2,500. This language usually applies to smaller volume contracts.
- Other contracts state that you will be charged the difference of the current market price including supplier margin compared to the price at the time of signing, multiplied by the remaining contract volume. Assume the remaining quantity is 1,000 MWh, current market price of $54 per MWh and the price at signing was $58 per MWh. The EFT charged would be $4,000
- It is important to understand prior to signing a contract under what criteria different suppliers will consider waiving the ETF if a business and/or location is permanently closed.
- Change in Law
- Change in Law language does not impact the commodity price but can move the amount charged for transmission, capacity, ancillaries and losses.
- Change in Law language allows a supplier to modify the fixed rate from what is stated in the contract.
- Generally, Change in Law is allowed for changes to charges that are a direct result of a governing body changing a regulatory pricing component. This can be a result of a new law or a change to an existing law.
- Suppliers define changes in law differently in their contracts. Some specify that only increases or decreases from true law changes can be passed through to you.
- Some supplier contracts allow the supplier to pass through price increases or decreases regardless of the reason for the change. An example of this is when new regulatory charges are posted such as transmission rates. Transmission rates change on January 1 every year. Some contracts allow for a price adjustment based on the new transmission rates being published.
- Understanding what can cause a price adjustment is important. If a contract can be adjusted for anything that impacts the supplier’s cost, you may see a better offer at the time of contracting only to have the rate change during the life of the agreement.
This is just a sample of the terms that can be very different from contract to contract. All terms should be reviewed and understood.
The IRMA Energy Team has vetted the contracts of the suppliers we work with. We understand the differences in their contracts and have requested changes to contracts that we viewed as overly risky or lacked transparency. In most cases suppliers comply with IRMA’s requested changes making modifications to their standard contracts.
Let the IRMA Energy Team help you to better understand the terms of an electric contract prior to you signing it.
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