Supply contracts often seem confusing and complex to the average business owner, as they are full of legal and energy industry jargon. We review this language for you to ensure that there are no surprises in the contract. When shopping your electric or natural gas account, here are a few key clauses that are important to look out for:
Automatic Renewal Clause
When a contract expires, many suppliers will enroll the account in an automatic renewal program if left unmanaged. These programs vary in length from month-to-month up to a full year. Even if the account is being managed, some suppliers require 30-60 days’ notice prior to the end of the contract if you do not wish to be enrolled in an automatic renewal program. It is important to understand your electric and natural gas supplier’s policy on these programs to prevent your company from being swept into an autorenewal program at higher-than-market rates.
Early Termination Fees
Most suppliers include language regarding their early termination fees (ETFs). However, each supplier may calculate these differently; the two most common types are flat fees and damages. Flat fees tend to be a one-time fixed charge (e.g. $100 per account). Other suppliers will charge you the difference between your contract rate and what they can sell the electricity back at. This is also known as damages. Damage fees are usually more expensive than flat fees because they are allocated across the remaining months of the contract.
Some suppliers may reserve the right to check a customer’s credit at any point during the contract. If it does not meet their standards, they can terminate the agreement, even if you are paying your utility bills on time. This provision is less common than the others listed above. However, it can help differentiate between the best suppliers.
In electricity contracts, suppliers may have a provision that requires customers to notify them if there will be a material deviation in their usage. In most cases, it is up to the client to decide if any change is considered material. So, if you believe your business will be expanding in terms of building size or energy usage, it is important mention this during the contract submission process.
Larger natural gas users may find a provision referencing swing tolerance in their contract. Suppliers will model out your expected monthly usage and state that if you deviate from this by a certain percentage, any additional usage will be charged at market rates. If your natural gas usage has been volatile in the past, it may prove beneficial to look for contracts that have a 100% swing tolerance. There is a slight premium on these types of products. However, they can eliminate your exposure to the commodities market.