No crying over spilt milk: how volume tolerance works in electricity contracts

Do you know that when you sign a business electricity contract, you effectively commit your business to use a certain amount of electricity over a year? And that if you exceed or undershoot that amount, your electricity supplier could charge you for the difference?

This restriction on your electricity use is down to a clause commonly called ‘volume tolerance’. As far as we know, all UK business electricity suppliers include it in the T&Cs (terms and conditions) of their fixed price contracts. And it could expose your business to an unexpected bill at the end of each year of your contract.

I understand you’re busy and it’s easy to be tempted to skim or even skip reading the T&Cs of every electricity quote you compare for your business.  But it’s risky.

So here’s a better shortcut: The short and simple story of volume tolerance and what it means for your business. Take a few minutes to read it and I guarantee you’ll be a more informed energy buyer for your business.  

Why volume tolerance exists at all

The economic crash in 2009 lead to an unprecedented 8% fall in business electricity consumption in a year. Electricity suppliers were left with commitments to buy large volumes of electricity from power stations that their largest customers now wouldn’t use. The cost of selling off that electricity at lower prices ran to tens of millions of pounds.

What does that mean for your business?

To protect themselves from that risk in future, electricity suppliers introduced the volume tolerance clause as standard in their business contracts.  It gave them a way to share those huge costs next time around.

How volume tolerance works

I know many people find volumes of electricity hard to picture. So I asked my marketing team to find an interesting way to explain this complex clause. They came up with this creative ‘if electricity was milk’ analogy. 

Just imagine that your business electricity contract is like signing up for 12 months of milk deliveries. Then follow the story below, looking left for milk and right for electricity, and it will all make perfect sense.

For MilkFor Electricity
You sign a contract and agree to a forecast

You order two pints a day. Now the milk supplier, the milkman, knows how much he needs to supply you over the year.

Your electricity supplier will base the forecast on how much you used last year, or your own forecast if you provide one. 

… which translates into a fixed price.

Your milkman – let’s call him Milky – adds your needs to his bulk order from dairy farmers. He gives you a fixed price by simultaneously agreeing a price upfront with the farmer for the whole year.

Through the wholesale market, your supplier commits to buy from power stations the amount of electricity you’ll need next year. This sets the price you’ll pay.

Then you need more …

Johnny, your teenage son, acquires a thirst for chocolate milk. Your milk consumption shoots up. You leave a note out asking Milky to deliver an extra 2 pints a day (Johnny’s really into it and has the hunger of a teenage boy). You leave out the extra money.

Your business gets a flood of new orders so your electricity consumption rises. You pay for more units of electricity at your agreed fixed price.

… which leads to a surprise bill.

Come the end of the year, Milky presents you with an extra bill. You’re confused. You believe you’ve paid for the extra milk Johnny wanted. Milky explains how the dairy farmer’s short-term milk prices were higher than the price he secured at the start of your contract, plus Johnny’s choc-milk-fad ran to many, many, many extra pints. To cover the extra costs, he needs to charge you for the difference. He can, thanks to the volume tolerance clause in your contract.

The supplier explains they had to buy more electricity at a higher price through short-term markets and can charge you for the difference through the volume tolerance clause.

Or you need less…

Instead of fancying chocolate milk, Johnny leaves home for university. You need much less milk and ask Milky to deliver one pint a day. ‘No problem’ says Milky. For the rest of the year you pay for a pint a day at the original fixed price he gave you.

Some of your customers cancel regular orders so your electricity consumption drops. You pay for fewer units of electricity at your agreed fixed price.

…which leads to a different surprise bill.

This time Milky explains your extra end-of-year-bill is to cover the difference between the price he secured for you at the start of your contract and what he could get for the pints you didn’t want.

The supplier explains they had to sell off electricity at lower prices through short-term markets and can charge you for the difference through the volume tolerance clause.

Make sense?

So that’s how volume tolerance clauses work. They don’t affect what you pay in your regular monthly bills. But if your electricity use varied a great deal against your forecast, you could get an extra bill at the end of the year.

Who gets charged and when?

The trigger for being charged is a significant difference (up or down) between your actual and forecast consumption. What qualifies as significant depends on the buffer – called a volume tolerance threshold - in your contract. For instance our Fixed + Protect contract allows for a 20% variation without charge whereas our Fixed + Reflective contract has a tighter 10% threshold. Our Fixed + Peace of Mind contract has no limit – you can use as much or as little power as you need to with no risk of a volume tolerance charge.

In practice, electricity suppliers don’t like upsetting customers. So they may choose not to charge you if the wholesale electricity price was stable during your contract. Remember it’s the combination of large swings in prices and volumes which creates large unexpected and uncontrollable costs for the supplier.

Should volume tolerance worry you?

You should check the level at which the volume tolerance threshold is set in the contracts you’re considering. You can compare the threshold for each of EDF Energy’s fixed price contracts in the ‘cost of electricity’ description on this page.

If your electricity consumption doesn’t vary much from year to year, a volume tolerance clause is not much of an issue. Don’t worry about it.

But if your electricity use is changeable, or if you have no idea how much it might change, a contract free of such a restriction is safer. In which case, for your next business electricity contract, go for our Fixed + Peace of Mind option

As far as we know, it’s the only fixed price business electricity contract on the market free of a volume tolerance restriction. So choosing Fixed + Peace of Mind is an easy way to find, well, peace of mind.

Need more help? Watch this video.

Bio

Posted by Philip Valarino, Senior Manager, Business Sales

Phil Valarino heads up EDF Energy’s Business Sales. The team undertakes an extensive range of contracting and account management activity across a broad spectrum of B2B customers, both in UK and Europe. He has over ten years of experience across the energy industry having held various positions across Sales & Marketing both in the UK and France.

Comments

Tom Richardson
I like the worked example, really puts it into simple terms for customers. I will use this with CCS customers to explain the how advantageous CCS's agreements using EDF are even more beneficial as our agreement has no volume tolerance clause.

Completely irrelevant to energy but if only this statement was true for UK dairy farmers "dairy farmer’s short-term milk prices were higher "
November 13, 2015 at 3:35pm
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