Energy supply contracts can contain hidden language and fine print that creates unpleasant financial surprises for businesses when skipped over or not fully understood.
Energy Supply Contracts – Term Comparison Example
One of our customers recently reached out to us for help understanding the terms of a natural gas contract. We quoted them a two-year contract with a low fixed price. Afterward, a different company reached out to this customer promising them an even lower rate. They questioned why they should lock in a price with us when the other company could beat our price.
So we took a closer look at the terms of the offer and here’s what we found…
Energy Supply Contracts – The Devil’s In the Terms and Conditions
As previously explained, we offered this customer a low, fixed-price natural gas contract. For the sake of this example, let’s say we offered the customer a rate of $3.90/MCF and the other company quoted them $3.10/MCF. That’s a considerable difference at first glace. But when we examined the program details, we discovered the price was only an introductory price good for June, July, and August. Since our customer – and many businesses like them – only use natural gas for heating, their consumption is at the lowest point during June, July, and August.
What happens to the rate after August? The fine print showed the price was subject to change on a month-to-month basis. That “deal” would have left the customer subject to undefined variable rates. In fact, the fine print indicated the price would be based on competitor pricing, market conditions, supply sources, and pertinent industry charges. Should be easy enough to gauge, right?
Not only is it impossible to predict that expense (making it likewise impossible to budget), it would have exposed the customer to risk should prices spike.
Our research ultimately revealed our customer likely would have paid substantially more over the life of the contract compared to the agreement they signed with us.
Energy Supply Contracts – Important Do-It-Yourself Tips
This experience points to the importance of making sure you thoroughly read and understand the terms of any energy supply contract that you sign. And while this list is not exhaustive, here are a few things you should should keep in mind when evaluating energy supply contracts.
Contracted Rate Structure – As you examine the agreement, make sure you can answer the following questions:
- What is the price per unit?
- Is the rate fixed or variable?
Fixed rate simply means the rate does not change over the term of the contract.
Variable rate means the rate changes at an interval that should be specified in the contract.
- If the rate is variable, how frequently does it change? More importantly, is there a price cap? Will you be notified of the price change?
- If the contract stipulates the price is only an introductory offer, when does that price begin and end? Once the introductory rate expires, is the new rate fixed or variable?
Contract Term – How long is the contract? When does the contract begin and end? Note that as you approach the end of your contract, prematurely entering into your next agreement will generate a cancellation of your existing agreement and could result in early termination fees. On that topic…
Early Termination Fees – Under what circumstances is it assessed? How much is this fee? How is it calculated?
Contract Expiration/Renewal – What happens when the contract expires? If you don’t sign a different agreement, are you moved to a month-to-month contract or does your contract automatically renew for a specific term?
Make sure you know the written notice period you must observe to cancel without penalty.
Energy Supply Agreements – Help for Busy Decision Makers
It takes time to compare supplier prices and contracts. Deciphering the industry jargon that muddies the process can compromise your confidence in the decision you have to make. We’re here to guide you through the process if you need help or have questions. We look forward to working with you. You can contact us here.