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The Procurement Professional’s Guide to Negotiating Energy Supply Agreements Part 2: Termination Fees

There is nothing worse than unmet expectations. When procuring energy supply, the expectation is always that you will get the best price. The frustration starts when you think you’ve procured the best price, but because of poorly negotiated contract terms, you end up paying much more.

two hads break the contract agreement

In our initial installment to this series, we investigated the successful negotiation of Payment Terms – and the impact on your overall supply and price if the terms are poorly written. It really has more to do with which party (the buyer or the seller) is shouldering the risk. The assessment and extent of Termination Fees – the focus of this installment – are no different.

Termination fees assessed by an energy supplier don’t just apply to the overall contract, but typically apply on an account-by-account basis. So even if your situation involves 300 electricity accounts, closing just one account (due to something like a move or demolishing a building) can subject your organization to early termination fees for that one account. Under most circumstances, an early termination fee would be calculated as the cost of all the unused energy remaining under your contract plus additional administrative costs.

Do you anticipate moving or selling sites within your “portfolio”?

For a client with a small number of accounts, with little to no anticipation of moving or selling, the termination fee language is not that important. However, if your portfolio consists of many different accounts and locations, the possibility of having to move, close down, or otherwise vacate a particular location is much more a reality.

For large organizations that have multiple locations throughout a particular region, leaving a facility or opening up operations in a new building can be commonplace. But this can create a lot of stress when synchronizing with utility supply through an electricity or natural gas contract.

One key factor to negotiate into your agreement is that the supply contract addresses “substitutions.” In other words, if you move from one location to another, be sure that you can “move” that energy supply contract along with you. This ability to substitute keeps you from paying what would otherwise be a potentially high fee for deleting that account from your contract. Without this substitution clause, even a move could be considered an early termination of that account. You don’t want to negotiate a great rate for your electricity or natural gas, all to have it undone because you sold a couple of locations, or demolished a particular building, or took down a series of street lights.

How often do you add or delete accounts?

In our next installment of the “Five Keys to Negotiating Energy Supply Agreements,” we will discuss add/delete clauses in contracts. However, adding or deleting accounts could easily impact your costs in the form of early termination fees. Start by honestly assessing your organization’s potential need to add or delete accounts within your “portfolio.” If sites are being added or deleted on a regular basis, you want to first address this through an appropriate add/delete clause.

At the same time, you need to see what kind of fee you would pay when you delete a site. The point is that if you anticipate deleting a significant number of sites, you need to push very hard for termination fees on the lower end of the range – combined with a robust add/delete clause that will allow you to delete a larger number of sites at no penalty.

How is the early termination fee calculated?

Even after addressing this clause with a full understanding of your particular needs, it is important to understand how the supplier will calculate an early termination fee should the issue arise. The fees can range all the way from payment of all unused energy plus significant administrative costs on one end to no fees at all, given certain conditions are met, on the other end.

In general, you want to push for language that reflects the actual process of the supplier “selling” the unused energy back into the market. If the supplier sells back for a gain, your fees are very minimal (typically just involving the administrative costs). But if the supplier sells back for a loss, you as the buyer are subject to paying for the loss. Be sure that your contract terms don’t leave you responsible for the full value of the unused power, without taking in to account the net position the supplier has once it sells back into the market. Negotiate a fee reflective of what happens when the unused power is sold back into the market.

Another key aspect to negotiate into your contract is whether the supplier will agree to waive early termination fees under certain conditions. For instance, if you are in the business of buying and selling properties, you may want to push for a clause that states you are not assessed fees if, in fact, you sell the property to a new owner. The supplier will need to approve the credit of the new buyer and will always push for that new buyer to assume the existing contract – but in some cases, you can get contract language that gets you off the hook in the case of a sale.

Focus on middle ground

Negotiating favorable termination fee language into your energy contract is always a good move. However, it will be significantly more important to those organizations that anticipate having certain accounts deleted from the contract or potentially the termination of an entire contract. Entities like municipalities or large national companies with many locations will want to really focus on this language. Likewise, real estate companies that frequently buy and sell properties will also want to pay close attention to this language.

Like all other factors we are evaluating, termination fee language is either favorable to the supplier or the customer – and the end goal is to find language somewhere in the middle. You don’t want to end up paying too much of a premium for shifting the risk back on the supplier, but at the same time, get the kind of language you need to keep your costs in check.

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