Beware the ‘take or pay’ trap
Traditional mains gas supply contracts for non-domestic users carry a ‘take or pay’ clause that allows the supplier to charge you should your demand rise or fall above certain limits. For some, this clause applies to contracts as low as >25,000 therms a year, while other suppliers only apply it to deals above 3M therms a year.
Typically these charges kick in if your actual consumption varies by more than, or less than, 20 per cent of your nominated contract volume. However, the clause may not only charge you for the difference in actual consumption back up to the 80 per cent limit but the difference back up to the 100 per cent of the nominated supply. And just reducing the nominated volume is not a straighforward solution because most gas supply companies will not quote on anything other than the annualised consumption figures supplied by Transco – immaterial of what your forecast consumption may be.
Gas suppliers are now invoking these penalty clauses on a regular basis. These ‘adjustments’ are often made some 12 months after the contract period, long after the event and frequently when all budgets for that period have closed.
Nowadays the majority of companies are seeking ways of reducing their energy consumption as a result of the UK government’s Carbon Reduction Commitment legislation.
This and the reduction in activity because of the recession has meant many businesses have seen a significant drop in energy usage in the past year, which has taken organisations below the 80 per cent threshold where they are penalised by the punitive take or pay clause. And it gets worse – in a move to increase margins, many of the electricity supply companies have now implemented very similar clauses.
How can the energy watchdog permit punitive terms and conditions that fly in the face of the government’s strategy to drive down energy consumption? If you fail to meet the government targets you will be penalised and if you over-achieve and reduce consumption by more than 80 per cent you are penalised by the take or pay clause.
If your supply contract is across multiple sites ensure take or pay volumes are calculated on the consolidated group capacity. Check the fine print of the supply contracts and ensure that if you cannot avoid such a clause, ensure your energy reduction targets are in line with the take or pay penalty.
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Great points. This is a very important clause to review when purhasing gas contracts and sometimes electricity contracts. Your annual usage is normally taken for Transco and their figures are often not very accurate as they don’t get regularly updated. Your best to make your own assessment and ask the supplier to base the take or pay clause on that figure. As energy brokers we always review this clause and have the negotiating power to amend these clauses. On request some suppliers will remove the take or pay clauses altogether and some will increase the margins from 80/120% to 70/130% giving greater leway. The importance of the take or pay terms offered are almost as important as the price offered as strict take or pay clauses might result in costly penalties. So what seems the cheapest deal might not be. Where take or pay clauses are a big problem is where there are IGT pipelines (Independent Gas Tranmissions). IGT’s don’t allow suppliers to adjust their nominated usages on behalf of the customer forcing the supplier to pass on the cost.
Ben Dhesi
Head of Energy Management
Pulse Commercial Utilities Ltd
Ian
Your points are well made and there is a clear contradiction with the general thrust of carbon reduction initiatives. Energy supply companies and OFGEM need to address this issue to prevent customers being hit with a “double whammy” of carbon credits and take or pay penalties in their efforts to comply.
I am surprised that this is not discussed more often on purchasing forums as these clauses seem wholly weighted in the favour of the suppliers.
From my own experience, the risk from inaccuracies in the Transco consumption data falls squarely with the end customer and reductions in levels of activity (brought on by market contraction, for instance) where processes involve significant energy usage can be highly costly.
Bundling demand with other users in a brokered deal via one of the energy consultants is one approach to avoid this risk, alternatively (if volumes allow)there are flexible deals which allow reforecasting of demand on a periodic basis.
I don’t know whether “take or pay” has ever been fully tested in the courts and other correspondents may be able to assist in clarifying its legal basis.
Tim Noble
Procurement Manager
Arriva UK Bus
Yes take or pay has been tested and approved by the Courts in 2008. See link below:
http://www.herbertsmith.com/NR/rdonlyres/C85C9E69-A71B-4791-96B2-D9D5E043961D/6873/Energy_ebulletin120308.html