Beware the 'take or pay' trap

6 December 2011
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. ☛ Something you want to get off your chest? 
Get on the SM Soapbox. Send a brief outline of your proposed article to rebecca.ellinor@supplymanagement.com
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