Everything You Should Know When Negotiating Energy Supply Agreements
Posted by Tradition Energy
Several aspects of energy agreements can easily trip up even the most seasoned procurement professionals. Unless you are aware of some key terms and slight verbiage adjustments that can drastically affect the price you pay on your bill, you could walk away thinking you secured a good deal – when the agreement tilts in the supplier's favor.
The same focus applies when negotiating an energy supply agreement, such as electricity or natural gas. Everything seems to come down to price. After all the talk and all the negotiation, ultimately, the decision comes down to one question: "What am I paying?"
It's Business, Not Personal
Like almost any industry where the customer pays for some service regularly, energy suppliers often treat penalties and fees as a source of revenue. The first thing to be aware of is that energy suppliers may try to capture revenue through additional fees resulting from agreement terms more favorable to them than the purchaser. This process isn't to suggest that suppliers are sneaky or underhanded. It's just business.
The five elements below can result in additional fees depending on how you negotiated your agreement. While many terms comprise an energy supply agreement, a handful directly affects what you pay monthly.
1. Payment Terms
While the most familiar, this aspect of your agreement can also be the trickiest and potentially costly. To achieve a lower cost, agreeing to a shorter payment window, for example, may earn you better rates but can also result in hefty late fees.
2. Termination Fees
Among suppliers, termination fees are typically the least flexible of the points we address here. Termination fees are assessed if you terminate an agreement before it expires. The rationale for the payment is that when you sign an energy supply agreement, the supplier buys that specific amount of energy for you. If you terminate early – without using/paying for all the energy, they secured for you – the supplier will need to sell that unused energy back into the market.
Termination fees can range. On the low end, some suppliers charge the cost of selling that unused power back into the market. On the high end, other suppliers include exorbitant penalties for terminating on top of any losses incurred from selling the energy back into the market.
Buyers for large entities must deal with expansion and adding (or deleting) meters to (or from) their energy agreements. Energy expansion is typical for customers with multiple meters spread over various locations, groups that frequently open new locations or build new sites, or enterprises that establish (or remove) lots of infrastructures need to pay close attention to these clauses.
Most suppliers do not include an add/delete clause option. It is an administrative hassle, and market uncertainty makes it a risky proposition for the supplier. Working closely with your energy advisor to structure agreement language is key to your agreement's success. Failure to do so can add penalty fees when not correctly negotiated.
4. Usage Bandwidths
Many agreements are restrictive regarding energy use that falls outside (above or below) the pre-estimated monthly volumes. Bandwidth limits can make for a costly bill if you buy energy outside your agreement terms while the market is much higher than when you first secured your agreement rate.
Suppliers are across the board regarding their standard agreement language about usage bandwidth. Some suppliers offer unlimited bandwidth initially, while others may offer it as a negotiation tactic. Natural gas agreements, for example, typically do not allow bandwidth changes. In contrast, electricity agreements, on the other hand, often have a guaranteed rate regardless of the actual amount of electricity you use.
5. Material Changes
Regardless of anything else in your agreement, if your usage changes "materially" and negatively impacts the supplier, the supplier has the right to impose high penalties, unilaterally reprice your rates, or even terminate your agreement.
As you negotiate one of these in your favor, the supplier will enact countermeasures in the other two to swing the agreement back into their favor. If you arrange a clear and limited definition, the supplier may counter that by lowering the add/delete percentage or reducing your usage bandwidth.
When negotiating energy agreements, it's not just the sticker price that impacts your overall spending. The terms and conditions play a massive part in the amount you pay. Do you want to control your energy spending without dealing with legal agreements and roadblocks, as mentioned above?
Tradition Energy and Kinetic GPO deliver cost-saving solutions, so you don't have to lift a finger. Participants of OMNIA Partners can utilize Tradition Energy's energy consulting and management services as an extension of your procurement team, thanks to their competitively solicited and publicly awarded group purchasing contract. Tradition Energy advisors will work to minimize your energy spending and operate as a neutral intermediary safeguarding the best interests of participants of Kinetic GPO.