Most commercial and industrial (C&I) electricity contracts feature Load Flexibility, also known as load variation, an important factor energy users consider when they are presented with energy tenders by prospective retailers. But what is it really, and how does it come into play?
In general, going down the energy tender route gives businesses security because they know they have purchased their electricity at a fixed price, allowing them to budget and forecast.
However, some businesses forget to factor in the penalties they might face if they exceed or fall short of the amount of energy they agreed to purchase from the generator.
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 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’ contracts so clients know exactly what they are signing up for.
What is load flexibility?
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 energy 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 20% load flexibility, that means they can consume anywhere between 800 to 1,200MWh/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 energy is bought in real-time which is likely to be more expensive.
What are the risks of breaching a load flex clause?
- Being required to pay financial penalties calculated based on the cost incurred by the retailer.
- The retailer 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?
- Large commercial and industrial energy customers that present a higher risk to energy retailers, should the usage targets be missed.
- Businesses that have fallen short of consuming the volume of electricity agreed on. This leaves the 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 who signed a long-term agreement, are planning energy generation or efficiency projects and did not consider the effect on future energy use projections agreed on in the energy supply agreement.
- Businesses unsure about their future energy requirements but have agreed to an extended-term electricity supply contract.
- Businesses signing with certain retailers who offer less favourable load flexibility terms.
What can be done to manage the risk:
- Consider future business requirements including plans to scale up or down.
- Consider the age of plant and equipment, the impact of future upgrades, and wear and tear
- Consider future energy projects and the impact they might have on consumption
- 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 risk is to sign with a flexible retailer that will not come down hard on your business if you exceed or fall short of your obligations.
Retailer load flexibility index
(Contracted load < 50 gWh)
(Contracted load < 5 gWh)
(Contracted load < 5 gWh
|4th||Alinta||-20% / +20%|
|Simply Energy||-20% / +20%|
|7th||Origin||-10% / +10%|
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?
Energy rates, although important, are just one measure of a retailer’s value. 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 energy contracts, Leading Edge Energy provides a detailed comparison of a broad range of retailer contract terms as part of our energy 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 firstname.lastname@example.org.
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. You may also track developments in the energy market through our monthly updates or just learn how electricity prices in Australia are going during the year in our blog.