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Thursday 25th of June 2020 | Posted In: Buy and Sell, Buying energy

Energy contract volume tolerance

What is it, why is it in my contract and how do I avoid charges?

On your electricity and gas contracts you may see something that says ‘volume tolerance’ or ‘take or pay’ without much explanation of what this means. It is often overlooked when it comes to signing but is worth taking note of what you are agreeing to.

What is it?

When you sign a contract with a supplier you are agreeing to use a certain amount of electricity throughout the contract based on the information you gave them. When the contract is secured with the supplier, they normally purchase the power required in advance for your supply at the prices that were agreed based on this volume. The volume tolerance is a range either side of the volume secured by the supplier that they expect you to stay within.

Why is it in my contract?

Since the 2009 crash suppliers have had to protect themselves against customer usage not being reached and so they introduced something called ‘volume tolerance’ to ensure they could reclaim losses for incorrect energy purchases.

What can it cost me?

What this means in most contracts is that you are outside of your volume tolerance by more than 20% above or below the consumption on your contract you may be charged at the end of the year for not meeting the usage that your contract price was based on.  Suppliers now write this clause into their terms and conditions and the tolerance level can change between suppliers usually 15-20% increase or decrease.

Generally, only the larger users are billed for this but as we are currently in unprecedented times it would be worth checking with your supplier to find out what their volume tolerance would be and if it will affect you as legally, they can apply this to any business consumer.

Who is most at risk?

If you know your consumption is likely to change if you are planning to increase or decrease output over the term of the contract you are more at risk. Our recommendation is to ask the supplier to remove the volume tolerance clause if you feel this is likely. Not all suppliers will do this but those who can we instead add a small risk premium into the unit rates instead, alleviating the risk of a charge further down the line. If you have a steady consumption year on year you probably do not need to worry about this.

It is also worth checking your current contract if the impacts of COVID-19 have had a significant impact on your energy usage as suppliers are likely to be having to apply these charges with the impact on their customers this year.

Please call our Bespoke contracts team on 024 7669 8885 if you have any further questions.