Below we explain what this means, when volume tolerance charges will apply and how the charges are calculated.
To protect themselves and customers from big swings in energy prices, energy suppliers aim to buy enough electricity in advance to match what their customers will use.
When it comes to setting up a new business supply contract, you’re agreeing that you will use a certain amount of electricity over your contracted term. This enables your supplier to offer you a fixed price based on the amount of electricity that they will have to buy for you.
So, what happens if you use more – or less – than planned? This is where a volume tolerance clause comes in.
What does volume tolerance mean?
Volume tolerance is the percentage that you can go under or over your forecast energy usage without incurring an additional charge. Your contract will define what percentage your volume tolerance is set at.
For example, having a volume tolerance of 20% means thatif you use less than 80% or more than 120% of your agreed usage, your supplier can apply a volume tolerance charge. This charge is usually a percentage of your unit rate, per unit outside of your tolerance threshold.
This charge is there to help your supplier recover the cost of either buying more power for you at a higher short-term rate or having to sell power that you didn’t use for less than they paid for it.
How are charges applied?
To see how charges can be applied in practice, take a look at the following example.
A large business is forecast to use 600MWh of electricity per year. Their electricity supply contract has a unit rate of £0.20 per kWh and a volume tolerance of 20%. Their charge for breaching this threshold is 30% of their contracted unit rate.
Good Energy monitors the customer’s electricity usage monthly. The business is forecast to use 50MWh per month, which means they can use between 40-60MWh without breaching their threshold. Any usage above or below this amount is subject to a volume tolerance charge of £0.06 per kWh.
Scenario one: the customer used more power than forecast
The customer’s usage throughout the year is displayed in the table below. Over the course of the year, they had an overuse of 120 MWh above their volume tolerance threshold
We calculate the total charge by multiplying the volume of overuse by the charge for breaching their volume tolerance threshold.
120 MWh = 120,000 kWh
30% of £0.20 = £0.06
Total charge: 120,000 x £0.06 = £7,200
Scenario two: the customer used less power than forecast
The customer’s usage throughout the year is displayed in the table below. Over the course of the year, they had an underuse of 160 MWh below their volume tolerance threshold.
160 MWh = 160,000 kWh
30% of £0.20 = £0.06
Total charge: 160,000 x £0.06 = £9,600
How often could you be charged?
Volume tolerance charges are often applied at the end of an annual contract term. You may have gone over or dipped under your tolerance band at different points throughout the year, and an annual charge will collect all these amounts together in one. You will see this listed as a volume tolerance charge on your statement.
Volume tolerance charges may be applied quarterly instead, covering under- or overuse during the past three months.