Commercial Energy Contract Basics

For business owners, energy is often a top-5 operating expense. Negotiating a commercial electricity or natural gas contract differs significantly from signing up for a residential plan. The contracts are more complex, the stakes are higher, and the pricing is customized based on your specific usage profile.

Residential vs. Commercial: What's the Difference?

Residential rates are "matrix" priced—anyone in the zip code gets roughly the same offer. Commercial rates are "custom" priced based on:

• Load Factor: How consistently you use power.
• Peak Demand: The maximum amount of power you draw at once.
• Volume: Total annual consumption.
• Creditworthiness: Suppliers take on risk by buying power for you in advance.

Key Contract Components

1. Fixed vs. Index vs. Block & Index

• Fixed-All-Inclusive: The safest bet. One rate per kWh that includes energy, capacity, transmission, and ancillaries. Easiest to budget.
• Index (Pass-Through): The rate floats with the market. If the market crashes, you save. If it spikes, you pay. Risky for small business, common for large industrials.
• Block & Index: A hybrid. You lock in a fixed rate for a portion of your usage (the "block") and pay market rates for the rest.

2. Swing (Bandwidth) Provisions

This is a critical clause often overlooked. It dictates how much your actual usage can deviate from your contracted usage.

Example: A 100% swing provision means you can use as much or as little as you want without penalty. A 10% swing provision means if your usage varies by more than 10% (up or down) from the forecast, the supplier can penalize you or charge current market rates for the difference.

Tip: If your business has volatile usage (e.g., seasonal shifts), look for "full swing" contracts.

3. Material Change Clause

If you significantly change operations (e.g., add a new production line or shut down a shift), the supplier may have the right to renegotiate the rate.

4. Regulatory Change Clause

Almost all contracts allow the supplier to pass through new costs mandated by law or grid operators (like PJM or ERCOT) that were not in effect when the contract was signed.

Negotiation Tips

• Start Early: Do not wait until your contract expires next week. Start looking 6-12 months in advance. You can sign a contract today that starts in the future to lock in current low rates.
• Competitize: Get quotes from at least 3 top-tier suppliers.
• Check the Term: Sometimes a 24-month term is cheaper than 12 months because of "backwardation" in the forward energy markets (future prices trading lower than spot prices).