Did you know as a business you may be paying for electricity you don’t use? You could also be overpaying if you go over a set usage of electricity with your electricity supplier. In this article, we help explain what volume tolerance is.
When you sign a business electricity contract, you are committing your business to using a certain amount of electricity over a year. If you exceed or undershoot that amount, then your electricity supplier may charge you for the difference.
This restriction is due to a common clause known as ‘volume tolerance’. As far as we are aware, almost all UK business electricity suppliers include volume tolerance in the terms and conditions of their fixed term contracts. This could result in your having an unusual bill at the end of the year.
Why does the volume tolerance clause exist?
Following the economic crash of 2009, there was an unprecedented 8% fall in business electricity consumption within a year across the UK. Electricity suppliers are committed to purchasing large volumes of electricity from power stations. So they were left in the difficult position that the demand for this electricity had dropped so dramatically. This resulted in energy companies losing tens of millions of pounds, selling off energy at lower prices.
How does this affect your business?
The volume tolerance clause was introduced as standard to protect electricity suppliers by sharing those costs with their business customers.
How does volume tolerance work?
When you sign an electricity contract for your business with a supplier they will estimate how much energy you are likely to use. This is based on how much you used the previous year. You can also provide your own forecast if you prefer.
Your supplier then commits to purchasing that electricity from power stations. This allows them to give you a fixed price for your contract. This all works okay if your usage is the same or very similar to your estimate.
If you go over your usage estimate
If your usage is above the estimate, the volume clause allows your supplier to charge you for this extra use. The rate would likely be higher for that electricity than you have been paying throughout the year.
The reason you may pay a higher rate is because your supplier will argue that they have had to purchase the additional electricity through short-term markets.
If you undershoot your estimate
If you use less than was estimated you still pay the full fixed rate price. This is despite not requiring some of the electricity you are paying for.
Who gets charged and when?
You would only face additional charges if your usage is a significant difference (up or down) between your actual and forecasted consumption.
The volume tolerance is a threshold in your contract which determines at what point additional charges can be triggered. This could be around 10 or 20% depending on your contract terms and conditions. Suppliers will usually offer a contract package that has no limit meaning you would receive no additional charges, although as you would expect these contracts are likely to be higher cost.
In practice, suppliers want to keep their customers happy so even if your business does exceed the threshold in your terms and conditions, they may choose not to charge you if the wholesale electricity price was stable during your contract.
Should you be concerned about volume tolerance?
It would be a good idea to check the volume tolerance level in your terms and conditions or when considering a new contract. Just so you can keep in mind if possible additional charges may be likely.
If your usage is similar to your estimate, it is unlikely you would receive additional charges. However, for peace of mind, you should go for a contract without a volume tolerance restriction meaning you would face no additional charges.
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We can give advice on avoiding volume tolerance charges, contact us today for help and guidance.
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