What is volume tolerance?
It is standard practice for electricity and gas supply contracts to contain a ‘volume tolerance’ clause.
As suppliers typically forward purchase the commodity element of an energy supply contract, these clauses serve to protect suppliers from market risk in the event that the end-user under (or over) consume against their contracted volume by more than a defined percentage; usually between 20% and 40%.
In the event that the consumer falls outside of their contracted tolerance, in some cases they will have to compensate the supplier for any financial loss.
Carbonxgen typically try to negotiate the removal or extension of volume tolerance clauses when procuring energy supply contracts. However, in some instances the complete removal of the clause is not possible and the end-user must therefore accept a degree of risk.
How do I know if there is a volume tolerance clause in my current supply contract?
The % tolerance is normally shown on the supply contract itself (i.e. the bit you sign) although it’s often worth checking the Terms and Conditions as well.
How significant is the risk?
In simple terms, volume tolerance penalty charges are typically calculated based on two inputs:
- the amount of usage that is ‘out of tolerance’;
- the spread between the wholesale commodity price on the date that the supply contract was locked-in, and the out-turned price on the short term wholesale market.
Given that the COVID-19 outbreak has led to a significant reduction in energy demand by consumers, as well as a collapse in short term market prices, it is safe to say that the pandemic has dramatically increased the volume tolerance risk to consumers.
As a rough-cut risk assessment, it many cases the exposure is around 1-2p/kWh for each kilowatt hour of usage that the consumer is out of tolerance.
What should I do if I think I may breach my volume tolerance?
If you believe that you are likely to breach your volume tolerance, Carbonxgen’s advice would be to contact the supplier.
Although some consumers may feel that “keeping quiet” will help mitigate the risk of tolerance charges being applied, the truth is that suppliers will likely have already made a commercial decision as to whether they will look to apply the charges.
By opening up a line of communication with your supplier it will enable for you to assess whether or not the exposure is real. It may also help the supplier to mitigate some of the risk, whilst allowing for discussions to be had around spreading any potential future costs.
If you have any questions regarding the above, or specifically in relation to your account, please do get in touch with your account manager or the procurement team:
Call: 01252 560 379