Minimum Usage Fees Explained: When Suppliers Charge for Not Using Enough

You expected your February bill to be lower than January—you used less gas because of warmer weather. But your supplier charged you a flat minimum, and you ended up paying almost the same total. This surprise illustrates a common energy contract feature: the minimum usage charge or minimum monthly charge. Unlike your utility's base charge (which is transparent and unavoidable), minimum usage fees can blindside customers who don't understand how suppliers structure contracts.

This guide explains what minimum usage fees are, why suppliers use them, which customers are most affected, and how to identify and avoid excessive minimums.

What Is a Minimum Usage Fee?

A minimum usage fee is a clause in an energy supply contract that guarantees a supplier a minimum monthly revenue from your account, regardless of how much energy you actually consume. If your actual usage falls below the minimum threshold, you pay the minimum charge instead of your calculated usage cost.

What You Pay = MAX(Actual Usage Cost, Minimum Monthly Charge)

Real Example: How Minimum Charges Apply

Contract Terms:

• Electric rate: 12¢ per kWh
• Minimum monthly charge: $35

Scenario 1 (Higher usage month - January):

• Actual usage: 400 kWh
• Calculated cost: 400 × $0.12 = $48
• What you pay: $48 (exceeds minimum, so actual cost applies)

Scenario 2 (Lower usage month - September with AC off):

• Actual usage: 200 kWh
• Calculated cost: 200 × $0.12 = $24
• What you pay: $35 (hits minimum charge because $24 < $35)

The impact: By using 200 kWh instead of your expected usage, you're charged an extra $11 ($35 - $24). Over 6 low-usage months, that's $66+ in extra annual charges.

Why Suppliers Use Minimum Usage Charges

The Supplier's Perspective

Energy suppliers argue that minimum charges reflect real costs:

• Hedging costs: Suppliers buy energy months in advance. If they contract to serve 500 customers and expect 500 × 400 kWh/month of consumption, but suddenly everyone shifts to heat pumps and uses 200 kWh/month, the supplier has overcommitted and incurs losses.
• Administrative overhead: Reading meters, processing bills, managing accounts, and customer service cost money regardless of volume.
• Risk management: Minimum charges protect suppliers from seasonal demand swings that could make contracts unprofitable.

The Reality

Minimum charges also serve as revenue protection. They guarantee suppliers income even from conservation-conscious customers who reduce usage, limiting their incentive to compete aggressively on price. Residential customers rarely benefit from these clauses—commercial and industrial customers are the primary targets.

Types of Minimum Usage Charges

1. Minimum Monthly Charge

Guarantees revenue each month. Most common type.

Example: $30/month minimum regardless of usage. Used by 15-25% of competitive suppliers in Pennsylvania and Texas.

2. Minimum Annual Usage Charge

Calculated on annual (not monthly) basis. Allows suppliers to collect across all 12 months, smoothing seasonal variation.

Example: Annual minimum of $360 (equivalent to $30/month). Actual monthly charges vary, but you're guaranteed to pay $360 annually by year-end.

3. Minimum Monthly Demand (kW-based)

For commercial customers, minimums are based on peak power demand, not total energy.

Example: Business contract requires minimum 25 kW demand charge ($15/kW) = $375/month minimum, even if actual peak demand is 10 kW that month.

4. Tiered Minimum (Complex Contracts)

Larger commercial accounts sometimes have minimum charges that vary by usage band.

Example: If you use less than 5,000 kWh/month, you pay a $200 minimum. If 5,000-10,000 kWh, minimum is $400. This incentivizes higher usage.

Who Is Most Affected by Minimum Usage Charges?

Identifying Minimum Charges in Your Contract

Minimum usage charges aren't always obvious. Here's where to find them:

In Your Contract

• Search for: "minimum charge," "minimum usage," "minimum monthly," "demand minimum"
• Look in: Terms and Conditions, Rate Schedule, Pricing Details section
• Format varies: Sometimes listed as a percentage of expected usage, sometimes as a fixed dollar amount

Calculating the Impact

Example Contract Language: "Minimum monthly charge equal to 50% of the average monthly bill based on 12 months of historical usage"

What this means: If your average monthly bill is $100, the minimum becomes $50. In months you use less than $50 worth of energy, you still pay $50.

Red Flags in Contracts

• "Subject to minimum charges as detailed in Rate Schedule C"
• "Customer shall pay the greater of actual consumption or minimum monthly charge"
• "Minimum of [X]% of estimated annual usage"
• Vague language like "supplier reserves the right to apply minimum charges"

Strategies to Minimize the Impact of Minimum Charges

1. Avoid Suppliers with High Minimums When Shopping

When comparing rates:

• Ask suppliers: "Do you charge a minimum usage fee?"
• Compare total annual cost including minimums, not just per-unit rates
• Example: Supplier A: 11¢/kWh + $30/month minimum vs. Supplier B: 12¢/kWh + $0 minimum. For 3,000 kWh annual usage (250/month), A = $1,065 vs. B = $1,080—nearly the same.

2. Negotiate Minimums Before Signing

For commercial contracts, minimums are negotiable.

• Offer longer contract (3 years instead of 1) to justify lower minimums
• Request minimums based on 80% of average usage (not 100%)
• Ask for seasonal adjustments (lower minimums in summer, higher in winter for gas)

3. Choose Annual Minimums Over Monthly

If minimums are unavoidable, annual minimums are better for seasonal businesses.

Example: Retail store with summer peak and winter slump. Monthly minimum of $50 means you overpay in slow winter months. Annual minimum of $600 spreads costs across all 12 months, reducing overpayment months.

4. Ensure Usage Baseline Is Realistic

For contracts specifying "minimum of X% of historical usage," verify the baseline:

• Was the historical data from a year with unusual demand? (e.g., COVID lockdown year for commercial)
• Has your business structure changed since the baseline?
• Request baseline adjustment if circumstances have significantly changed

Minimum Charges vs. Base Charges: What's the Difference?

These are often confused but work very differently:

Base (Customer) Charge: Fixed monthly fee the utility charges all customers for meter maintenance, billing, infrastructure access. Non-negotiable, unavoidable, typically $10-25/month.

Minimum Usage Charge: Supplier-imposed fee that applies only if your consumption falls below a threshold. Negotiable in commercial contracts, avoidable by choosing no-minimum suppliers.

Combined Impact Example: Base charge $15 + Minimum usage $30 + Actual supply cost $20 = $65 total, even though you only consumed $20 worth of energy.

Next Steps

• Review your current contract: Check if you're paying a minimum usage charge. Look for the terms detailed above.
• Calculate annual impact: Multiply your monthly minimum by 12 to see your actual exposure. Compare to actual bills to verify if minimums applied.
• Shop with awareness: When comparing suppliers, use How to Choose an Electricity Supplier and specifically ask about minimums.
• Negotiate if commercial: For business accounts, use Decoding Energy Contract Terms to understand all negotiable elements.
• Compare total cost: Use our rate comparison to factor in minimums, not just headline rates.