When signing a business energy contract, it’s important to know and understand the terms. Energy contracts can have complex language and clauses that affect costs, penalties, and flexibility. Each supplier may have different rules, so paying attention to these details is crucial. Energy brokers can help interpret contracts and ensure your business gets the best deal while avoiding costly surprises.
What Is A Retail Energy Contract?
Retail energy contracts are legal agreements between retail energy suppliers and end users. These contracts can exist between a supplier and a commercial business, or a residential homeowner, and dictate the terms of the supplier’s service. The contracts are required in all deregulated states by state regulators and are important since they outline the key elements of the agreement.
Key Components of a Retail Energy Agreement
While each energy contract may differ slightly, all retail energy agreements include certain key elements required by state Public Utility Commissions. These elements clearly define the rates, contract terms, and accounts covered.
Price or Rate
Contracts specify the price for electricity or natural gas and what costs are included. Fixed-rate contracts are straightforward, while hybrid contracts, like block + index, can be more complex.
Contract Term
Every energy contract has a term length. Fixed-rate contracts lock in a price for the duration. Contracts also include start and end dates, along with rules for what happens after the term ends.
Customer Accounts
Contracts list all utility accounts that the supplier will serve. Each account includes detailed service addresses to avoid any confusion.
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Types of Retail Energy Contracts
When you sign up with an energy supplier, you agree to buy their energy at a set price for a certain period. Depending on your needs, you can usually choose between fixed-rate, variable-rate, or sometimes hybrid plans.
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Fixed-Rate Plans
Fixed-rate plans lock in your price per kilowatt-hour (kWh) for the length of the contract. This means your rate stays the same even if market prices rise or fall. Fixed-rate contracts can include details like bandwidth, price components, and auto-renewal clauses.
Variable-Rate Plans
Variable-rate plans change with the market. When demand is high, your rate goes up. When demand is low, your rate goes down. Understanding your energy usage year over year is important to see if a variable plan could save you money.
Hybrid Energy Plans
Large energy users may choose hybrid plans, which combine fixed and variable rates. These plans allow you to lock in prices during volatile periods and take advantage of lower market rates when possible. Hybrid contracts can offer big savings but are complex and should be reviewed carefully.
Pro Tip: Hiring an energy broker can help you understand these contracts and negotiate better terms. Using a Letter of Exclusivity (LOE) gives your broker even more leverage with suppliers.
Energy Contract Language
Whether you are a commercial customer or an energy broker advising customers, it is important to understand the details of a fixed-rate energy supply contract and the specific contract language. When you are aware of the nuances of an energy supply agreement, you can better advise your customers and become a more successful energy broker.
Swing Clauses
Most fixed-rate energy contracts include swing, or bandwidth, clauses. These clauses explain how much energy you can use while keeping the same fixed price per kWh. It shows the limits for energy usage under your contract. Since retail energy suppliers are pre-purchasing energy to fulfill their fixed-rate obligations, they need to forecast the correct amount of energy to purchase.
Too Little Usage
If a customer uses too little energy during the contract, the supplier may have extra energy that they already paid for. If market prices are lower, the supplier could lose money when selling that extra energy.
Too Much Usage
If a customer uses more energy than expected, the supplier may not have enough energy to cover the fixed-rate contract. The supplier buys energy ahead of time at market prices. Extra usage must be bought on the open market. If prices are higher than the fixed rate, the supplier could lose money.
The Bottom Line
Suppliers include usage tolerance clauses, also called swing or bandwidth, to protect themselves. Customers may have to pay extra or face penalties if they use too much or too little energy.
Fixed Components
A fixed-rate energy contract also has fixed components and variable components. Knowing the difference is important.
Utility Distribution
Energy supply and utility distribution are separate charges. The fixed-rate only applies to the supply portion. Customers should understand they are paying separately for delivery.
Energy
The main part of a fixed-rate contract is the actual energy. This applies to both electricity and natural gas contracts.
Transmission / Transport / Capacity
Other important costs include:
- Transmission: Moving electricity across the national grid.
- Transport: Moving natural gas through pipelines.
- Capacity: Paying generators to be ready for demand.
These three costs are included in the total fixed rate and should be considered when reviewing a contract.
Auto-Renewal Clauses
Auto-renewal clauses are an important part of some energy contracts, especially matrix contracts. These clauses allow the supplier to automatically renew your contract for a set term or price if you don’t take action at the end of the contract. Auto-renewals can cause problems if you or your broker are unaware of them. For example, if you try to switch suppliers, the original supplier may charge an Early Termination Fee because the contract was automatically renewed. Many customers assume their contract has expired, only to find they are now locked into a new term.
Pro Tip: Reputable energy brokers can often negotiate to remove auto-renewal clauses. Working with a trusted broker ensures you get favorable contract terms and avoid unexpected fees.
Rescission Periods
The rescission period is another important part of your energy contract. Depending on your state and customer type, you may have a few business days after signing a new energy contract to cancel it without any penalties. Rescinding a contract means you can legally cancel it without fees or other consequences. This can be very useful if energy market prices drop shortly after you sign, allowing you to avoid overpaying.
Early Termination Fees
Always check for early termination or cancellation fees in your energy contract. These fees apply if you end the contract before it expires. Many commercial energy contracts include high penalties. These fees can be costly and hurt your business financially. That’s why it is important to understand the termination terms before you sign. In some cases, you may not be able to avoid a cancellation fee. However, knowing the potential cost ahead of time helps you make better decisions if you ever need to cancel the contract.
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Other Fees
Always review what is included in your energy price. Some suppliers add extra or hidden fees to the contract. This is common in residential markets. A supplier may offer a low fixed rate but then add monthly management or service fees. These extra charges can increase your total cost. Reading the full contract helps you avoid surprises and understand what you will really pay.
Material Changes
It is very important to understand material change terms in your energy contract. A material change happens when your energy use changes a lot during the contract term. This change must be outside normal business operations. For example, a material change may occur if you add new space to your building and increase energy use by 30%. It can also happen if you close part of your facility and use much less energy. Some material change clauses allow suppliers to charge penalties, raise rates, or even cancel the contract. To avoid problems, calculate your energy usage before signing a contract. This gives you a clear baseline and helps protect your business.
Electricity: True Fixed vs. Fixed With Potential Adjustments
When you review a fixed electricity contract, you need to know what “fixed” really means. Some fixed rates stay the same for the full contract term. Others can change based on certain costs. In the past, a fixed rate always stayed fixed. Suppliers did not change the price during the contract. In recent years, this has changed. Energy capacity and transmission costs have become less predictable. Because of this, many suppliers now include clauses that allow them to adjust fixed rates. These adjustments cover increases in capacity or transmission charges. If you sign one of these contracts, your rate may go up. To solve this issue, some suppliers now offer plans called true fixed, traditional fixed, or super fixed. These plans do not allow price changes during the contract term. Before signing, ask your energy broker if your contract includes any adjustment clauses. This helps you avoid surprises later.
Natural Gas: Burner Tip vs. City Gate Rates
If you are signing a natural gas contract in a c, you need to know where the gas is delivered. Some contracts are priced at the city gate, while others are priced at the burner tip. The city gate is the point where gas enters your local pipeline system. If your contract is priced at the city gate, you may have extra charges to move the gas from that point to your facility. The burner tip means the gas is delivered directly to your building. This price usually includes all delivery costs. If you want to understand your true natural gas rate, make sure your contract includes burner tip pricing.
Hiring an Energy Broker
Working with an experienced energy broker can make energy contracts much easier to understand. Energy brokers know the details of retail energy contracts and work with many of the largest energy suppliers. They can help you avoid energy scams and negotiate better contract terms. An energy broker can also represent you if there is a dispute with a supplier. In addition, brokers handle the paperwork and steps involved in switching energy suppliers. They can help you move away from a utility provider or transfer your energy contract if your business relocates. In the long run, hiring an energy broker can save your business time, money, and stress.
Need Help Negotiating Your Energy Contract Terms?
If you need help getting better energy contract terms, we can help. This is true whether you are a customer or an energy broker looking for sales support. As one of the nation’s leading energy brokerage firms, we help customers find energy contracts that match their usage needs. We also support our partners with a team of experienced energy industry experts.