Volume tolerance explained
We sat down with Chris Bennett, our Pricing Analyst, to find out about volume tolerance, what it is and how it works…
What is Volume Tolerance?
Volume Tolerance, also known as Take or Pay, is a contract clause that allows suppliers to bill the customer for any significant changes in their annual consumption figures – these are agreed when the contract is signed.
Why does it exist?
The 2009 economic crash caused an 8% fall in business electricity consumption, this left suppliers with a huge amount of surplus energy that had to be sold way below its original price.
So volume tolerance was introduced as a standard to all business contracts to protect suppliers when buying large volumes of energy. It’s a way to share those huge costs if the unexpected happens.
COVID-19 and Volume Tolerance
COVID-19 has forced many businesses to close their doors for lengthy periods of time, which will have had a huge impact on electricity and gas consumption, way beyond the 8% seen back in 2009. As such, volume tolerances are being breached on an unprecedented scale.
The graph shows a 30-day rolling average of electricity demand from a portfolio of Manufacturing businesses. As you can see electricity consumption drastically dropped during lockdown one, two and three, which has left suppliers with a surplus of energy.
How Volume Tolerance works
Typically Volume Tolerance brackets are set at 80/120%, which means that a business can use 20% more or less energy annually than what was originally agreed for the contract period. The volume tolerance is usually activated when a business goes above or below this level. Occasionally, the tolerance can be widened or even removed, but this depends on the supplier and how much appetite they have to win the customers business.
If suppliers are looking at enforcing the Volume Tolerance clause, most of them will review the consumption figures annually and then take a view on whether to activate the clause and charge the customer for any breaches of the +/- 20% bracket.
If major events such as COVID-19 have impacted your business and in turn, your energy consumption it’s worth checking your current contract terms, as suppliers are likely to be applying these charges. If you’re not sure where to begin, our experts are here to help.
Author: Chris Bennett, Pricing Analyst
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