If you’ve ever secured an electricity or gas contract for your business, you may have been subjected to clauses whereby you commit to consuming energy within certain percentage thresholds. If you consume outside of these limits, the costs can be substantial and arrive at unexpected, inconvenient times.
How do these clauses work?
Suppliers may impose restrictions on how much energy you must consume during your contract, normally in relation to how much energy you currently consume per year.
If, for example, you use 100,000 kWh of gas, a supplier might restrict you to using no less than 80,000 kWh, and no more than 120,000 kWh without penalty. If you were to consume less than 80,000 kWh or more than 120,000, the supplier might impose additional charges.
Some suppliers might apply the thresholds annually, whilst others might apply them over the duration of the contract.
Do all business energy contracts impose strict consumption limits?
No. Not all suppliers or contracts impose upper or lower consumption limits. There is no rule as to which suppliers, types of contract, for large or small businesses have such conditions. Read your contract carefully, ask your supplier, or your broker should be able to check this for you. Indeed here at CostAdvice, we’d always be able to let you know about any consumption restrictions imposed on your contract.
What thresholds do suppliers impose?
If imposed, the most common lower threshold is 80% of the nominated contract consumption, and the most common upper threshold is 120% of the nominated consumption.
So, if your nominated electricity consumption was 150,000 kWh per year, you would need to consume between 120,000 kWh and 180,000 kWh.
What happens if we consume outside the lower or upper limits?
This depends on the exact circumstances of the contract, but there are two main common types of additional charges:
- ‘Take or pay’ type clauses
- ‘Take or compensate’ type clauses
With take or pay clauses, breaching the lower threshold can be costly because suppliers might look to charge you up to the 80% consumption figure, despite you not using the energy.
Let’s take an example. If you agreed an electricity contract for 1 year with a nominated consumption of 100,000 kWh, your lower threshold may be 80%, or 80,000 kWh.
If you were to only consume 60,000 kWh, the supplier might look to charge you for the additional 20,000 kWh up to your minimum level. If your rate was, say, 25p/kWh, this would equate to a charge of £5000. That’s a large cost for energy you haven’t consumed.
With take or compensate clauses, the supplier may look to charge you for the losses they have incurred from either buying more energy at a higher cost, or selling back to the market at a lower cost.
Using this method, customers may find the charges to be lower, or there may be no excess charges to pay.
If, for example, you consumed less energy, but the market price had gone up, the supplier may have been able to sell the energy you haven’t consumed back into the market and make a profit – so they wouldn’t need to also penalise you.
I’ve received a bill for breaching the consumption thresholds, what can I do?
Firstly, check your contract to see what clauses the supplier is relying upon.
Secondly, double-check the figures. Have they referenced the correct consumption for example. Suppliers can be wrong – so don’t assume their figures are 100% accurate.
You may also want to seek advice from your broker and see whether they can help speak with your supplier and negotiate a reduction.
In summary, although these clauses can have significant detrimental effects on your energy costs, not all suppliers apply these in the same way (if at all). So it’s really important that when comparing suppliers, you also have some understanding of your future energy consumption demands.
If you plan to use a lot less electricity, then you would want to ensure your supply contract doesn’t have a tight minimum consumption restriction.
Likewise if you were planning to have a Combined Heat and Power (CHP) unit installed, you would want to ensure your gas supply contract doesn’t have a tight upper limit for consumption.
If you need any advice on your supply contracts, then either call us on 0800 040 70 90 or email us at enquiries@costadvice.co.uk .
