Load Flexibility in Electricity Contracts – Managing the risk of getting it wrong

Most commercial and industrial (C&I) electricity supply contracts feature Load Flexibility provisions,  also known as load variation, an important factor electricity users should consider when they are presented with electricity offers by prospective retailers. But what is it really, and how does it come into play?

What is load flexibility in electricity contracts?

Load flexibility clauses are a feature of most Commercial & Industrial (C&I) electricity supply agreements.

The term refers to the amount, typically in percentage, a customer is able to fall short of or exceed their contracted electricity load. Put simply, load flexibility is the tolerance a retailer has towards a customer that fails to consume or exceed the contracted volume of electricity for a given year of the electricity contract.

For example, a business may go into a power purchase agreement with their retailer to use 1,000MWh/year, with 10% load flexibility, that means they can consume anywhere between 900 to 1,100MWh/year without incurring penalties. Anywhere above or beyond that, however, the customer will have to pay some fees.

Why does it exist?

When a commercial and industrial (C&I) electricity contract is executed, the customer agrees to purchase a fixed volume of electricity into the future.

Based on this agreement, the retailer is essentially buying electricity forward to supply the agreed volume of electricity into the future.

Should a customer fail to consume the volume of electricity as agreed, the retailer is left exposed to either a surplus or shortfall of supply. Hence, the clause exists to protect the electricity retailer by ensuring that they have a recourse if the customer does not use up the agreed-upon annual volume of electricity.

Why is the retailer sensitive to this? Electricity cannot be easily stored, so if the retailer is left with surplus supply and if they are undersupplied, the retailer may be forced to purchase from a high-priced spot market, unhedged. Spot market prices refer to prices charged when electricity is bought in real-time which is likely to be more expensive.

What are the risks of breaching a load flex clause?

• Financial penalties:   Being required to pay financial penalties calculated based on the cost incurred by the retailer.
• Renegotiation of contract:  The electricity supplier may require contract renegotiation, based on current futures prices which may have gone up since the original contract rates were agreed on.

Who is most at risk of non-compliance with load flexibility clauses?

• Long term electricity supply contract holders: Businesses who signed a long-term agreement, are planning electricity generation or efficiency projects and did not consider the effect on future electricity use projections agreed on in the electricity supply agreement.
• Large commercial and industrial electricity customers: Electricity customers with bills > $10K across single for multiple sites, will be monitored by electricity suppliers more than smaller customers as the impact to their electricity portfolio of breaching the load flex provisions will be higher.
• Businesses who have locked in rates that are higher than currently available market rates:  Electricity suppliers are left more financially exposed when electricity customers fail to consume their contract electricity usage, and the price of electricity is falling. Why? This leaves the electricity retailer with expensive surplus power that they will still need to sell, potentially at a loss due to rates going down since the contract commenced.
• Businesses unsure about their future electricity requirements but have agreed to an extended-term electricity supply contract.
• Businesses signing an electricity supply agreement with low load flexibility thresholds of 10% or less.
• Businesses who have taken up a “buying group” offer with other businesses who breach the load flex provisions. The penalty incurred may be shared by all group members.

What can be done to manage the risk:

To help business owners navigate through the process and make sure that they understand all the terms of their contract, Leading Edge Energy provides holistic energy management services that go beyond retail electricity and natural gas price comparisons. Our energy management consultants (EMCs) help match our customers with retailers that are able to provide what they need according to the clients’ business objectives and energy project plans.

One of the vital pieces of information our EMCs provide customers to facilitate with the decision-making process is a comparison of the load flexibility of each retailers’  electricity contracts so clients know exactly what they are signing up for.

What questions should I be asking when assessing my need for load flexibility?

• Plans for growth:  What are my business growth plans and how will this impact electricity usage?
• Plans to upgrade plant/equipment:  Am I planning to upgrade any of my plant/equipment and how might this impact my electricity usage?
• Plans for energy projects:  Am I planning to install solar, storage or electricity efficiency upgrades at my site and how with impact electricity usage?
• Consider the lease term
• Choose a retailer that can cater to your requirements

The simplest way to manage load flexibility risk:

The most effective way to manage load flexibility risk is to negotiate the best terms with your electricity supplier.  To assist you, here’s a guide on the standard load flex provisions across our panel of electricity retailers.

Retailer load flexibility index

Note:  The above table is based on standard offers issued by the respective retailers. More flexible terms can be negotiated, however, this is likely to impact the rates offered.

Do you want to learn more about Load Flexibility and electricity supply contracts?

The base electricity rates, although important, are just one measure of value in an energy supply agreement. Contract terms such as load flexibility, environmental charge pass-throughs, roll-in/roll-out provisions, blend & extend options, credit terms, payment options, late-payment fees, and credit card fees are just some ways in which electricity retailers may differ in value.

It’s important to be clear on what’s available and what you’re agreeing to. This is why, aside from asking the necessary questions so we can match your business with the most suitable electricity contracts, Leading Edge Energy provides a detailed comparison of a broad range of retailer contract terms as part of our electricity tender process.

Remember, our services are free to try and obligation-free, so we only succeed when you do. If you want to learn more, call us on tel: 1 300 852 770 or send us an email on hello@leadingedgeenergy.com.au.

You may also read about our other areas of expertise such as setting up gas tenders, procuring solar and storage, facilitating renewable energy PPAs and managing energy consumption, particularly for clients in the commercial and industrial sectors.