What is Volume Tolerance?

Volume tolerance is a clause in your energy contract's terms and conditions. It states that your usage must stay within a certain percentage of your estimated annual consumption (EAC), or you may be charged extra.

Most suppliers have this set at 80% / 120% (meaning you can go over or under your estimated annual consumption by 20% and not be charged extra).

For example, if your EAC is 100,000 kWh, the least you can use without extra charges is 80,000 kWh, and the most is 120,000 kWh.

Why does Volume Tolerance Exist?

When a supplier agrees your contract, it buys your expected energy in advance at a known price. If customers then use dramatically more or less than forecast, the supplier is left exposed. It must either buy extra energy at whatever the market charges, or sell the surplus back at whatever the market pays. Volume tolerance clauses exist to pass that risk back to customers whose usage swings far from the estimate.

The risk is real. During the 2008 to 2009 financial crisis, business electricity consumption fell sharply, leaving suppliers holding energy they'd bought at higher prices than they could resell it for. The COVID-19 pandemic repeated the lesson on a larger scale, when businesses forced to close temporarily used a fraction of their contracted volumes. Clauses of this kind became more prominent, and more strictly enforced, as a result.

How does volume tolerance work?

What happens if you use more energy?

When your contract is agreed, your supplier buys a fixed amount of energy based on your estimated annual consumption. If your business uses well above that estimate, the supplier must buy more on the wholesale market to cover the extra. Due to inflation, when the supplier purchases more energy though the grid the price has increased. To cover the extra costs, the supplier then charges you a volume tolerance fee at the end of your contract.

What happens if you use less energy?

Alternatively, consider the same contract from the other side. The supplier has purchased a fixed amount of energy, based on your annual consumption, to supply you over the contract term. However this time you are using significantly less energy than what was estimated. The supplier will then have to sell the energy which is left over at the end of your contract for a lower cost than what they bought it as. To cover the costs of this you will then be charged a volume tolerance fee at the end of your contract.

Either direction triggers the charge; volume tolerance isn't only a penalty for heavy use. A business that installs solar panels mid-contract, closes a production line, or simply has a mild winter can breach the lower bound. That's just as expensive as an expanding business breaching the upper one.

Which businesses are most at risk?

Volume tolerance bites hardest where consumption is genuinely unpredictable. Seasonal businesses such as hospitality, manufacturers whose output follows order books, and growing companies adding equipment are all exposed. So is any business planning changes such as on-site generation, electrified heating or vehicles, or a shift to hybrid working. If any of these describe your next contract term, the clause deserves attention before you sign, not after the charge lands.

How can your business ensure volume tolerance charges do not hit them?

If you know you will be using significantly less or more energy than you estimated annual consumption, then discuss this with your supplier. If you are a customer of Purely Energy we can do this for you.

To avoid going over your estimated annual consumption you should make sure your business is saving energy where possible. Purely Energy has launched a usage monitoring software to identify where and when energy is being wasted. For more information, please contact us.

Submitting regular meter readings will ensure your energy usage is tracked as accurately as possible and help avoid estimated readings. Estimated meter readings could lead to you being charged for more energy than you are using. Smart meters and Energy Management Systems (EMS) can help you identify patterns in your energy consumption, so if you think you will go over your agreed volume tolerance you can detect where energy can be saved.

Different suppliers have different volume tolerances, however, most work at an 80% / 120% margin.

What happens if I leave my fixed energy contract early?

When you sign a fixed energy contract, these are usually for 12 or 24 months and is a legally binding contract. If you want to leave your fixed energy contract early, then you will have to pay an exit fee. We would recommend to start looking for new energy deals 6-12 months before your current contract end date to make the most out of the energy market.

Contact us on 0161 521 3400 or email us at Info@purelyenergy.co.uk for any queries, and we will advise you on your next steps to ensure you can attain the lowest energy bills possible.

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