Take or Pay or “ToP” clauses can often be included in agreements for the supply of both electricity and gas. They are very much there to protect the supplier and it’s not uncommon for them to go overlooked in your contract negotiation.
What is a take or pay clause?
A Take or Pay or ToP clause is a condition inserted into a contract to assure the supplier that the buyer or customer, will purchase a minimum quantity of their product. If they fail to use or purchase that minimum value, then they face penalty charges.
Take or Pay in Energy Contracts
ToP functions very much as expected in an energy contract with one major difference, there is an upper cap as well as a lower cap.
Suppliers tend to set the standard take or pay conditions to 120% and 80%, so if you use more than 120% of you committed usage then you are exposed to penalty charges. Dip below 80% of your expected usage and also expect to see penalty charges.
Why is it there?
When a customer agrees to a contract with an energy supplier, the supplier will purchase the volume of energy to supply the customer in advance from the wholesale market. They will have based the contract on their modelling of the wholesale market and its rate at the time of committing to the agreement.
If the usage falls below the lower cap, the supply is left with a surplus of energy that they would then need to trade, potentially at a loss.
The upper cap is in place as if the supplier hasn’t purchased the required amount of energy to supply the customer they will need to purchase more, this leaves them exposed to market movement and the potential for purchasing at a higher rate then was initially built in to the agreement.
Can I negotiate?
Although the large majority of contracts contain this clause it is an aspect of the contract that is open for negotiation and in some cases can be negotiated as far as to have it removed from the agreement all together.
I have a Take or Pay clause and I am going to fall outside of the boundaries!
How the reconciliation period is structured here is important. Is it monthly, annually or contract length? You may have time to address the overuse or short fall.
If it looks as though you do not have the time frame to adjust or there has been a fundamental change in your usage the best route is to talk to the supplier, explain the situation and come to a mutual agreement on a way forward. This can involve addressing the difference with a renegotiate of the contract to only be exposed to the losses the supplier experiences purchasing the excess energy or selling back the shortfall.
You should never accept being charged the full cost for falling short as the supplier will always have an opportunity to sell the energy. You should only ever be exposed to their losses which significantly reduces your exposure.