Catalyst Commercial Services CEO, Chris Hurcombe, discusses Covid-19’s impact on business energy contracts – and how volume tolerance clauses could prove costly, if enforced.
The Volume Tolerance Clause (VTC) – something many businesses simply have not heard of. This is because it is one that rarely garners attention, but along with many other issues Covid-19 has brought this clause into (potential) effect.
Why? Well, in simple terms, VTC is the threshold set in energy contracts for energy use and if less energy is being used than predicted this can have financial implications.
If a business uses less energy than is forecasted in the contract year, the supplier has a right to claw this back and to recoup money from the business to cover energy not used. The conditions of many VTC are normally a minimum consumption and a maximum consumption threshold. These vary dependent on supplier and type of contract but are usually between 80-120%.
This means that retailers are committing to using the annual agreed amount of supply between these ranges. Use more than 120% then the supplier reserves the right to charge you more to cover the excess. Use less and the supplier reserves the right to charge you, for the bit you didn’t use. This is because suppliers purchase energy based on forecast consumption and if business consumption is less at the end of the year the supplier has to then sell it back to the markets, usually at a financial loss. This is where the cost to the customer’s demand occurs because it is less than expected and forecast.
Rarely are these clauses enforced, this may be as a result of brand and customer care or their billing systems don’t allow for this and therefore it would be a manual and costly process. It can also outweigh the benefits and therefore they just suffer the costs of selling back excess consumption to the Grid. Also, some suppliers don’t have the ability to measure this and or the billing systems in place to cope with the calculation. So, it’s not normally a big problem, as most suppliers will work with a TPI or customers if any change in volume was expected. If they know then they can manage it.
In ‘normal’ times, energy consumption doesn’t vary year to year, so the VTC poses little concern. The issue that occurs now is when energy use is changeable. The new normal has created this unpredictability and has impacted on energy consumption hugely creating a demand ‘erosion’.
For example, this was especially visible on Friday 22 May, where the day ahead gas price was 31% cheaper than the previous day.
For businesses with a fully flex contract the concerns of VTC will be minimal, but those in fixed contracts may see the VTC brought into force as suppliers look to recover costs in the ‘new normal’. This is because whilst in lockdown, businesses have not used the expected amount of energy and supplier are faced with an excess of purchased energy, that they then need to sell back to the Grid at a loss.
The Covid-19 pandemic and lockdown has meant that there will have been a split in how many businesses will have managed their energy consumption. With the new normal dawning, schools and businesses opening, retailers opening from 15 June and hospitality in July, some may see that their energy consumption has shifted and their annual consumption greatly different than forecasted.
For those that are well versed in good building controls practices, they will have ensured that all energy consuming building equipment was managed and switched off during lockdown. This will have reduced their energy consumption and in turn they will expect to see a financial benefit in energy spend. Moving forward they could also see lower consumption levels per day than pre-Covid-19 as they may operate shorter hours, have fewer staff onsite and for retailers and hospitality, may not see the high street footprint for months to come.
In light of all of this businesses have of course used less energy than forecast and therefore less than their contract had ‘allowed for’ with their supplier. Should the supplier bring in the VTC clause, businesses may see a demand for payment for energy not used.
As with all things Covid-19 focused, there is a great deal of uncertainty, the VTC is one such issue for businesses due to open and commence their ‘new normal’ this and next month. Will suppliers be forced to apply this and how do they charge for it given the massive falls in wholesale prices and what will this mean to businesses? Will businesses be charged, are they even aware this is an issue? what can they look to do about it? and is it even on their radar as a potential issue in regards to cost and procurement planning?
The coming months will soon determine what route suppliers take here and at what ‘unknown and probably unplanned’ cost this will have for businesses.