The Procurement Professional’s Guide to Negotiating Energy Supply Agreements, Part 1: The 5 Key Clauses That Must Be Mastered

Thursday, December 14, 2017.  Bob Wooten

Part One

When procuring goods and services, you understand how important it is to thoroughly investigate all your options. Your budget – and the financial well-being of your organization – depends a lot on the decisions you make. But when it comes to the procurement of energy, the process of evaluating and selecting your supplier is only the first part of the story.

Once you have selected an energy supplier, you must then enter into contract with them. You can have the best deal or the lowest price just waiting for you, but if can’t arrive at a mutually agreeable set of terms and conditions, you are just as far away as if you never started the procurement.

One thing to remember: You, as the purchaser, ARE entitled to a deal that works for you! So while the process is very important, you can – and should! – ultimately negotiate some, many, or all of the supply agreement terms with the chosen supplier to receive the potential benefits.

Handing Off Paperwork --- Image by © Cha Cha Royale/Brand X/Corbis

Through an ongoing series, we will explore the five key clauses that must be mastered in order to negotiate successful energy supply agreements:

1. Payment Terms
2. Termination Fees
3. Adding/Deleting Accounts
4. Energy Usage Bandwidth
5. Material Changes

Taken together, these five clauses will lead to getting the price you want from the supplier you want. Each of these should be viewed on a scale ranging from buyer-friendly to seller-friendly. Better yet, you should view each of these terms in relation to risk.

Risk is directly related to price from the seller’s perspective. If the seller shoulders more of the risk in the supply agreement, then they will charge a higher price. Lowering a supplier’s risk by shifting it to the buyer will yield a lower price. While getting the lowest price is always attractive, the trick is to avoid being sucked into an agreement that requires you, the buyer, to shoulder a high amount of risk that results in extra fees and penalties. These “hidden” charges will ultimately result in you paying more than the attractively low price – perhaps much more than you ever imagined.

The first key we will investigate is payment terms. Taken at face value, this seems like a fairly simple term to consider. When and how do you want to pay your energy bills? In 16 days, net 30, automatic draft, or some other arrangement?

Beyond these “simple” questions, however, lies a very important concept. The reason your payment terms are considered key is that how you negotiate them has a very significant impact on the risk shared by both parties.

Following are a few points to think about when considering the payment terms of an energy contract.

Who Wants the Cash?

Shorter payment terms are a risk to the buyer, while longer payment terms are a risk to the seller.

The job of an energy supplier is to buy the energy on the wholesale market and then sell to you as the retail buyer. The longer the gap between buying the energy wholesale and selling retail, the greater the financial risk to the supplier. Therefore, suppliers typically offer their best prices when the payment terms are the shortest. Conversely, most buyers want to hold onto their cash for as long as possible – so it is not unusual to see a supplier ask for 10 days to pay and a buyer to ask for 45 days.

Pure and simple, an energy supplier wants payment as soon as possible. Depending on the contract terms (and legality), a supplier may even try to “encourage” you to agree to pre-payments by offering a discount. If you are an educated buyer, you can avoid getting stuck with such terms that don’t benefit your organization. As with most contract terms, there is typically a comfortable middle ground here that both parties can agree to.

How Can We Avoid Late Fees?

Two things can happen when you agree to a very short timeframe to pay the bills. First, it becomes very likely that the bills are paid late. Second, with late payments come late fees and penalties. You can see very easily from this perspective that any benefits of getting a low energy price by virtue of agreeing to very short payment terms can easily be undone when you start adding in late fees.

Instead, negotiate for the payment deadline terms that you know your organization can meet. From this standpoint, you must consider the bill payment process of your organization – from the receipt of bills to the mailing of checks. If your organization tends to need a longer window to “cut checks,” then a short payment timeframe just isn’t going to work.

If you do insist on short payment terms to try and achieve a lower price, make sure you also read the fine print regarding how late fees are assessed. Then be sure to factor these fees into your overall energy budget to come up with a realistic cost estimate.

What Are the Bigger Credit Issues?

While late fees can cause immediate administrative headaches – from being a minor hassle to causing problems meeting your budget – the long-term and more damaging effects come from their impact on your credit.

As any credit agency will tell you, slow and late payments have a negative impact on the credit rating. One or two times can be forgivable, but an ongoing pattern of late payments can turn clean credit into something that most sellers want to stay away from.

The effects with procuring energy are also very predictable. One of the key factors that goes into how a supplier will price energy is the buyer’s credit rating. Typically, bad credit results in higher prices, collateral, or performance assurance. In a worst-case scenario, credit is so bad that a supplier will not even enter into contract.

So, again, trying to achieve good up-front pricing by agreeing to short payment terms can have a bigger long-term effect if you end up being late paying your bills. The result will be higher prices in the future, compared to what you’d be paying if you just had better payment terms – and that’s the best outcome.

The Take-away? Always Negotiate!

Before entering into an energy supply agreement, remember to negotiate! Be sure to enlist the help of a qualified energy advisor if you’re unsure of what or how to negotiate the best terms for your organization.

It may sound obvious, but you don’t need to blindly agree to the supplier’s payment terms. Make sure the terms are something your organization can live with and meet without penalties. Negotiating good payment terms will always be a strong key to getting the kind of energy supply agreement you want.

So, what happens when the ideal contract you negotiated is terminated early – perhaps due to you selling your building or moving locations?  Find out in our next installment, where we will discuss  “Termination Fees.”