How to Read Your Energy Contract Like a Professional
Ask Yourself, “Is My Fixed Price Product Truly Fixed?”
The energy market has experienced a period of sustained, lower prices and lower cost volatility for many energy cost components. As a result, customers are increasingly choosing fixed price energy products while additional non-energy cost components may be passed through.
While fixed price products seem like they can offer greater budget stability, it’s important to educate yourself about all cost components that make up your total energy costs.
Some supplier offers seem to have attractive prices, but these may exclude unknown, uncertain or unrealized cost components that are required for service. Instead of including these costs in the fixed price, these unknown costs may be deferred until they are realized and reflected on the customer’s invoice.
These pricing adjustments are often related to non-energy cost components such as capacity, transmission and ancillary services. Without a proper understanding of the cost of these components and your risk tolerance, choosing a fixed price option based on price alone could prove to be detrimental to your bottom line.
At Constellation, we aim to educate our customers to minimize surprises on your bills and enhance transparency.
How do I spot these in a contract?
The most common way prices can be changed is via a “material adverse change” (MAC) or “regulatory change” clause in the contract. While this language has been used to cover items related to an unknown or future change in a law, or a regulation impacting the cost to supply electricity to customers, some suppliers are revising or broadening their application of this contract language.
Here are just a few examples where MAC clauses have been used to change “fixed” price products to pass through costs to customers:
- Broadly labeling these changes as any change in governing laws, regulatory changes, Independent System Operator (ISO) rules and protocols, market rules, load profiles, or how a utility or ISO may calculate usage, or a change in interpretation or application of certain rules.
- Any utility change to a customer’s monthly capacity or transmission obligations.
- Change in fees or costs imposed by an ISO or government authority, or a change in application or interpretation of these changes.
- Any change by a utility, including a change in tariff, rate class, procedure or other process or change, that alters the supplier’s cost.
Here are some questions you can ask when reviewing the language in your contract:
- What circumstances trigger a price increase? The broader the language, the less “fixed” the price tends to be.
- Do I get the benefit if a change in law decreases a cost component?
- What rights do I have as a customer to challenge a pass-through cost? What are the consequences if I refuse to accept the change?
- What is the best practice of a particular supplier in invoking a regulatory change provision?
Two suppliers may have almost identical language, but may have a very different history in terms of invoking the language. It’s very important to ask your potential suppliers to describe examples of invoked price changes.
Consider Your Options
As an energy buyer, you can minimize your risk with various product solutions and a contract that is transparent.
For example, Constellation’s Peak Response Program is a completely voluntary program where customers are notified of predicted peak hours so they can reduce energy usage during that time. Customers will ultimately lower their Peak Load Contribution (PLC) for the following year or, in some cases, receive a credit based on actions taken.
Unlike traditional load response programs, customers are not penalized if they choose not to do anything when notified, and there is no charge for this service.
The benefit of a program such as this is realized after the contract is signed. While many suppliers offer a “Pass Through” option, Constellation has a unique solution that locks-in the capacity rate and PLC and provides the customer a benefit during their current term if they can actively curtail when called upon.
By choosing a contract based on the lowest price without a full understanding of potential pass-throughs, you could be leaving your business exposed to more risk than intended.
Customers who choose from Constellation’s wide variety of solutions can expect a transparent contract. We also believe in investing in our customers by educating them and providing them access to resources so their bills come without surprises. To get Constellation communications, resources and more directly to your inbox, subscribe at constellation.com/subscribe.
Guest Author: TJ Navarro, Manager – Inside Sales
TJ is responsible for developing and executing Constellation’s strategy to provide integrated energy solutions that help commercial and industrial corporations, manage and use energy. He focuses on finding innovative energy solutions that drive down overall energy costs by combining client’s power, natural gas, energy efficiency efforts, solar power, renewable energy, and load response into one comprehensive energy management strategy. He leverages his experience in energy efficiency, commodity and risk management, as well as energy and environmental data management to help customers lower their energy spend and reduce energy related risk.