Take or Pay Clauses in Business Energy Contracts

When comparing business energy contracts, you shouldn’t just look at the unit rate. The terms attached to the contract can also affect what your business ultimately pays, particularly if your energy consumption changes after the agreement has been signed.

For example, A take-or-pay clause. These clauses can commit a business to a minimum level of energy consumption or an associated payment, meaning a significant reduction in usage could still result in additional costs.

Understanding how these clauses work, and how they differ from other volume conditions, can help you assess energy contracts more effectively and reduce the risk of unexpected charges.

TL;DR:

• A take-or-pay clause requires a business to meet a minimum contracted energy commitment or make the payment specified in the contract if it falls short.
• The minimum volume, measurement period and treatment of any shortfall depend on the individual supplier and contract.
• A fall in energy consumption can create additional cost exposure even when the business is using less energy.
• Take-or-pay and volume tolerance are related ways of managing consumption risk, but they are not necessarily the same contractual mechanism.
• Accurate forecasting, appropriate contract flexibility and ongoing monitoring can help businesses reduce their exposure.

What is a take-or-pay clause in an energy contract?

A take-or-pay clause is a contractual provision that requires the buyer to meet a specified minimum energy commitment over an agreed period. If the business does not consume the required volume of energy, the contract determines what payment becomes due for the shortfall.

In simple terms, the business agrees to either take the minimum contracted amount of energy or pay according to the terms of the agreement if it does not.

Alex Dovey at Professional Energy Services explains what take-or-pay means for business energy customers and what to look for in your contract.



How does a take-or-pay clause work?

A business energy contract may be priced using an estimate of how much gas or electricity the customer expects to consume. Historical consumption, future operating plans and other information can all contribute to this forecast.

A take-or-pay provision then sets a minimum commitment against that expected volume. If actual consumption falls below the minimum commitment, the difference may become subject to the financial treatment set out in the contract.

There is no universal take-or-pay percentage or calculation that applies to every business energy contract. The minimum volume, period over which it is assessed, price applied to a shortfall and any other rights or adjustments must all be established from the individual agreement.

A simple take-or-pay example

Consider a business entering an energy contract based on forecast annual consumption of 1,000,000 kWh.

The contract sets a minimum take-or-pay commitment of 80%, giving the business a minimum contracted volume of 800,000 kWh.

During the year, changes in production reduce actual consumption to 650,000 kWh.

The business has therefore consumed 150,000 kWh below its minimum commitment.

That does not automatically mean the customer would simply pay its normal unit rate for 150,000 kWh of unused energy. The contract should specify how the shortfall is valued and what payment, if any, becomes due.

Some take-or-pay arrangements may also contain provisions allowing energy that has been paid for but not taken to be credited or taken at a later date. This is sometimes referred to as a make-up right. Whether such a provision exists, and how it operates, depends entirely on the individual contract.

Why do energy suppliers use take-or-pay clauses?

Energy suppliers need to plan for the amount of gas and electricity their customers are expected to consume.

When a business agrees an energy contract, its forecast consumption can form part of the supplier’s purchasing and risk-management decisions. If actual demand is significantly lower than expected, the supplier may be left with energy it purchased or hedged against a demand that no longer exists.

Market prices may also have changed by the time that excess volume needs to be managed. This can expose the supplier to additional cost.

A take-or-pay clause transfers some of this volume risk to the customer by providing greater certainty around a minimum level of demand or revenue.

Take-or-pay vs volume tolerance: what’s the difference?

Take-or-pay clauses and volume tolerances both deal with the risk that actual energy consumption differs from forecast demand. However, the terms should not automatically be treated as interchangeable.

A take-or-pay clause is primarily concerned with a minimum contractual commitment. Volume tolerance usually describes a permitted range within which actual consumption can vary around the agreed or forecast volume before another contractual mechanism applies.

Supplier terminology and contract structures vary, so businesses should establish exactly how any volume provisions operate rather than assuming a particular percentage or tolerance applies across the market. In the UK business contracts we review, a volume tolerance band, such as 80% to 120% of the contracted volume, comes up far more often than an outright take-or-pay clause.

An upper volume tolerance can also matter because a supplier may need to purchase additional energy if actual demand is significantly higher than forecast. If wholesale prices have changed since the contract was agreed, that additional volume can create a different cost exposure for the supplier.

Volume Tolerance in practice: a PES client example 

One of our multi-site leisure clients has an electricity contract with a volume tolerance measured over a rolling 12-month window, with a band of 20% either side of the agreed reference volume.

Because the window rolls, a few quieter months do not simply disappear at the end of a contract year. They remain part of the calculation until they fall outside the latest 12-month period.

At Professional Energy Services (PES), we track the client’s consumption against that reference volume whenever new supplier reporting becomes available. We calculate how much energy has been used over the latest 12 months and include an estimate for the month in progress.

This gives the client an early indication of whether consumption is moving towards the edge of the tolerance band, rather than discovering the issue only when the supplier carries out a reconciliation.

Is take-and-pay the same as take-or-pay?

Although the terms sound similar, take-and-pay and take-or-pay can create different contractual obligations.

Under a take-or-pay arrangement, the buyer typically has an obligation to take a minimum quantity or make the payment specified by the contract if that quantity is not taken. The English Court of Appeal has described take-or-pay agreements in these terms.

A take-and-pay structure can instead impose an obligation on the buyer to take the agreed minimum quantity and pay for it. Failure to take the required quantity may therefore amount to a breach of that obligation, rather than simply triggering the alternative payment mechanism found in a take-or-pay clause.

The distinction depends on how the contract is drafted, so businesses should check the actual obligations contained in their energy agreement rather than relying on the label applied to the clause.

A note on terminology: Professional Energy Services is not a law firm and this article does not constitute legal advice. In researching this guide, we found English-law commentary that distinguishes take-or-pay from take-and-pay provisions. Enforceability of take-or-pay provisions in English law contracts – resolved, published in the Journal of Energy & Natural Resources Law discusses this distinction in the context of English contract law. The Court of Appeal judgment in Birthish Gas Trading Ltd vs Shell UK Ltd & Anor [2020] EWCA civ 2349  provides a useful example of the court describing a take-or-pay agreement as requiring the buyer to either take delivery of a minimum quantity or pay for it.

What are the risks of a take-or-pay clause for businesses? 

The main risk occurs when a business expects to consume a certain amount of energy but circumstances subsequently cause demand to fall below the contractual minimum.

That change does not necessarily have to result from poor forecasting.

A manufacturer might reduce production after losing a major order. A business could close or consolidate sites, shorten operating hours or replace energy-intensive equipment. An energy-efficiency project might successfully reduce consumption, while the installation of onsite generation could lower the amount of electricity that needs to be imported from the grid.

Gas demand can also change because of weather, changes to building occupancy or alterations to heating processes.

These developments may all reduce the amount of energy the business needs. However, if they take place during an existing contract with a minimum volume commitment, lower consumption can create a contractual cost at the same time as the organisation is expecting its energy spend to fall.

The risk is therefore not simply “using less energy”. It is a mismatch between the consumption profile on which the contract was based and the way the business subsequently operates.

What should businesses check before agreeing a take-or-pay clause?

Before signing, businesses should review:

• The contracted consumption figure – is it based on recent and representative consumption data, and does it reflect any known changes to production, occupancy, operating hours or sites during the proposed contract period?
• The minimum commitment – what proportion or quantity must be taken, and over what period is compliance measured?
• How a shortfall is calculated – what financial treatment applies if consumption falls below the agreed minimum?
• Any volume tolerance provisions – does the agreement include lower and upper limits, and what happens if either is exceeded?
• Adjustment, variation or make-up provisions – are there any circumstances in which volumes can be changed, credits carried forward or other remedies applied?

Three things we check that are easy to miss:

• Whether the window is fixed or rolling – A contract year resets, while a rolling 12-month window can carry a quiet spell forward until it falls outside the latest 12-month period.
• Which volume the band is measured against – We have seen supplier reporting built on the industry annual quantity (AQ) for a gas meter rather than the forecast volume the contract was agreed against. If the two differ, the headroom you think you have may not be there.
• Whether tolerance is assessed at portfolio or site level – Check whether the tolerance is assessed across all your meters together or meter by meter, and what happens to the contracted volume when sites are added or removed.

A contract with the lowest apparent unit rate will not necessarily provide the lowest overall risk or cost if its volume requirements are poorly suited to the way the business operates.

There are occasions when Professional Energy Services (PES) may recommend against choosing the lowest headline energy price. If one contract offers a marginally cheaper unit rate but exposes a business with unpredictable demand to significantly tighter volume commitments, the potential downside may outweigh the upfront saving.

To put some illustrative numbers on it, take a site using around 2,000,000 kWh a year and choosing between two offers. Offer A is 0.1p/kWh cheaper, a saving of about £2,000 a year, but only allows consumption to fall to 90% of the contracted volume. Offer B has a lower minimum commitment of 80%. If demand falls by 25% to 1,500,000 kWh, Offer A leaves a 300,000 kWh shortfall against 100,000 kWh under Offer B. For illustration, if the contractual shortfall were valued at 4p/kWh to settle, that would equal to £12,000 under Offer A and £4,000 under Offer B. Even after allowing for Offer A’s £2,000 annual price saving, the cheaper contract ends up £6,000 worse off once its £2,000 saving is counted.

What happens if your energy consumption changes?

If a business identifies that consumption is likely to be materially different from the volume originally expected, the first step is to establish the size of the change and review the relevant contract terms.

This allows the business to determine whether consumption is still expected to remain within its contractual requirements or whether a potential shortfall or tolerance issue is developing.

The potential financial impact can then be assessed before the end of the contractual period. Where a supplier identifies a volume discrepancy, ask for the exposure to be quantified in both kWh and pounds, together with the contractual calculation used. This makes it easier to understand the scale of the issue and assess any proposed commercial solution.

Early identification matters because it creates more time to discuss the situation with the supplier or energy consultant. Depending on the agreement and the supplier’s commercial position, there may be options worth exploring where demand has changed significantly.

Any proposed payment, contract variation or other commercial solution should be assessed against the quantified cost of the existing volume exposure before a decision is made.

However, businesses should not assume that a take-or-pay clause can simply be removed or that contracted volumes can automatically be renegotiated. Any variation will depend on the existing terms and agreement between the relevant parties.

Monitoring the position throughout the contract is therefore preferable to discovering a substantial volume discrepancy only when the supplier carries out a reconciliation.

How Professional Energy Services can help

At Professional Energy Services (PES), our energy consultants help businesses assess their expected consumption, understand supplier contract structures and compare the commercial implications of different procurement options.

By considering consumption forecasts, volume flexibility and risk alongside price, we can help clients choose contracts that better reflect how their organisation actually uses energy.

Our support can also continue throughout the contract. Monitoring consumption and understanding changes in demand can help identify potential volume exposure before it becomes a larger commercial issue.

If you are reviewing a new business energy contract, are unsure how the volume terms in an existing agreement operate, or expect your energy consumption to change materially, speak to the Professional Energy Services team about your options.