Contract Terms to Watch: Early Termination Fees, Evergreen Clauses, and Pass-Throughs

Why the clauses matter more than the rate

Two suppliers quote 6.8 cents per kWh for 24 months. One passes through capacity and transmission, prices usage outside a 10 percent band at market, and renews month to month at a rate the supplier sets. The other bundles capacity, allows 100 percent swing, and ends at the term. Those are different products at the same headline rate. This page goes clause by clause in the order you will meet them. For the price-structure decision itself, see fixed vs. index vs. block-and-index contracts.

Term and start date

The term is the fixed period the price applies. The start date is usually the first meter read after the utility processes the enrollment, not the signing date. A term that ends in July puts your renewal negotiation in the middle of summer, when wholesale prices and capacity costs are highest, so many operators negotiate the length to end in a shoulder month. If you are leaving another supplier, the old end date and the new start date need to match to the meter read, or you spend a month on a holdover rate.

Price: what is in it and what is not

The price clause defines what the number covers. A fixed price is almost always fixed for energy. Everything else lives in the definitions and the exclusions:

Component	Typically fixed?	Where to look
Energy (wholesale, delivered to the utility zone)	Yes	Price definition
Capacity (in PJM, NYISO, ISO-NE, MISO)	Sometimes; often passed through	Price definition, capacity section
Transmission and network integration	Sometimes	Exclusions, pass-through clause
Ancillary services and losses	Sometimes	Exclusions
Renewable portfolio standard compliance	Sometimes	Exclusions, change-in-law clause
Gross receipts, sales, or utility taxes	Rarely	Taxes clause
Broker fee	Embedded in energy price	Not shown; ask

If capacity is passed through, your monthly capacity cost is your peak load contribution (your share of the grid's peak last summer) multiplied by the zone's capacity price. Our page on peak demand vs. peak usage explains how that contribution is set. Ask the supplier to show the capacity rate it used to build a bundled price, and ask the broker to show the fee. The page on how energy brokers get paid covers what a fair disclosure looks like.

Bandwidth, swing, and usage tolerance

A supplier that fixes a price has hedged roughly the volume it expects you to use, and the swing clause allocates the risk that you use more or less. The usual forms:

• Percentage band per month. Usage between, say, 90 and 110 percent of the contracted monthly volume is billed at the fixed price. Usage above the band is billed at the market index (sometimes plus a premium), and usage below the band is billed at the fixed price anyway, or you pay the difference between the fixed price and the market price on the shortfall.
• Full requirements, 100 percent swing. No band. The supplier serves whatever you use at the fixed price. Costs a bit more per kWh, and worth it for a facility in build-out or one that fallows rooms seasonally.

Most suppliers set the contracted volume from your prior twelve months of utility data. If you are expanding, that baseline is wrong by definition, so give the supplier a forecast and get the band set on it, in writing.

Pass-throughs and change in law

A pass-through clause lets the supplier bill you for cost changes that it did not price into your rate. There are two common versions, and they are not equivalent:

• Regulatory or material change. If a utility, ISO, or regulator changes a charge the supplier pays to serve you (a new transmission rider, a revised capacity obligation, a change in how losses are calculated), the supplier can pass the change through. This is standard and hard to remove, but you can narrow it: require that the change be a new or increased charge actually imposed on the supplier, require written notice with the calculation, and require that decreases be passed through as well as increases.
• Change in law. Broader. If any law or regulation changes the supplier's cost of performing the contract, the supplier can adjust the price. Watch for language that lets the supplier adjust for changes it should have anticipated, or that gives it a right to terminate rather than adjust. Ask for a symmetric clause: if the change lowers the supplier's cost, your price drops. Pass-throughs are the main reason two facilities on the same multi-site contract can see different price movements.

Early termination fee formulas

The ETF clause is where the money is if you close a facility, sell it, lose a license, or find a better price. Three structures show up:

1. Flat fee. A stated dollar amount, or a dollar amount per account or per meter. Common on small-commercial paper.
2. Per remaining month. A fixed charge multiplied by the months left in the term. Predictable, and easy to compare between quotes.
3. Mark-to-market plus administrative fee. The supplier calculates the difference between your contract price and the current forward market price for the remaining term, multiplies it by your remaining contracted volume, and bills that difference if it is positive, plus a fixed fee. If market prices have risen since you signed, the difference is negative and you owe only the administrative fee. If prices have fallen, you owe the supplier the value of the hedge it can no longer use.

A worked example of the third formula. Assume a facility contracted 3,000,000 kWh per year at 7.0 cents for 36 months, and wants out with 18 months remaining. Say the forward market for those 18 months now averages 5.5 cents. Remaining volume is 4,500,000 kWh. The mark-to-market is (7.0 minus 5.5) cents times 4,500,000 kWh, which is 67,500 dollars, plus whatever administrative fee the contract names. If instead the market had risen to 8.0 cents, the mark-to-market is negative and the fee is the administrative charge alone.

Negotiate a cap on the fee, a published index for the market price, a carve-out for loss of the premises or the license, and no fee when you leave because the supplier invoked a change-in-law increase. Some state rules limit ETFs for small customers. Connecticut, for instance, caps the termination fee for a residential customer at the lower of 50 dollars or twice the estimated average monthly bill, and prohibits any fee for a residential customer on a month-to-month variable rate [ct-pa-14-75]. Those caps do not reach a commercial facility, which is exactly why the formula in your own contract needs reading.

Auto-renewal, evergreen clauses, and notice windows

An evergreen clause keeps the contract alive after the term ends, typically month to month at a variable rate the supplier sets, until you or the supplier cancels. Some contracts instead renew for another full term at a new fixed price stated in a renewal notice. Either way, the operative question is the notice window: how far before the end of the term you must object, and how the supplier must warn you.

Several states set notice rules by regulation, mostly for residential and small customers:

• Pennsylvania. For residential and small business customers, the supplier must send an initial notice 45 to 60 days before the contract expires or terms change, and an options notice at least 30 days before, sent by first class mail [pa-code-54-10]. The initial notice must disclose any cancellation fee and state that the customer faces no cancellation fee for terminating after receiving the options notice [pa-code-54-10]. The options notice must explain how to accept the change, pick a different product, switch suppliers, or return to default service, and the envelope must say it contains important information about the expiration or change of the electric supply contract [pa-code-54-10].
• Connecticut. For residential customers, the supplier must give written notice of a price change between 30 and 60 days before a fixed-price term expires, and 45 days' notice with historical high and low rates when the customer would move to a month-to-month variable rate [ct-pa-14-75]. Customers with a maximum demand of 500 kilowatts or less have the right to cancel a new contract until midnight of the third business day after signing or receiving it [ct-pa-14-75].
• Maryland. Under the residential customer protection chapter, a supplier must give notice at least 30 days before expiration or cancellation of a supply contract, and the notice must say the customer returns to utility service unless it picks a new supplier [md-comar-20-53-07-10]. Residential contracts must state the amount of any early cancellation fee, and suppliers must deliver a contract summary on the commission's form [md-comar-20-53-07-08].

Notice the scope. Pennsylvania's rule covers residential and small business; Connecticut's protections are for residential customers and, for the cancellation right, customers at 500 kW or less; Maryland's chapter is titled Residential Customer Protection. A 1.2 MW facility gets nothing from these rules. Your protection is the clause you negotiate, so ask for:

• A renewal notice at least 60 days before term end, by email to two named addresses, with the proposed price.
• A holdover rate defined by a published index plus a stated adder, not "a rate determined by the supplier."
• A right to leave the holdover period at any time with 30 days' notice and no fee.

Then put the notice date in a calendar with a reminder 90 days out. The FAQ on contract fine print has the questions to ask on the renewal call.

Assignment and change of control

Most supplier paper prohibits assignment without the supplier's written consent, and many treat a change of control (a sale of the licensee) as an assignment. In an industry where facilities and licenses change hands often, ask for consent not to be unreasonably withheld against a defined credit standard, for a change of control not to trigger the ETF if the successor assumes the contract, and for the right to assign to an affiliate without consent.

Credit, deposits, and collateral

The supplier is extending you credit: it buys power today and bills you a month later. The credit clause lets it demand a deposit or letter of credit if your financials weaken, and terminate if you do not post it. Check the trigger ("in the supplier's sole discretion" is common; ask for objective triggers such as a missed payment beyond a cure period), the amount (often one to two months of estimated billing), interest on and return of the deposit, and whether the supplier can net a deposit against an ETF. Maryland's residential rule allows a supplier to deduct a cancellation fee from a customer deposit [md-comar-20-53-07-08], and commercial paper usually does the same. Cannabis licensees sometimes face stricter credit terms than other businesses of the same size; a broker who works in the industry will know which suppliers are reasonable here. See energy broker vs. going direct.

One last habit: read the definitions section first. Contract Quantity, Market Price, Regulatory Event, and Change in Law are where the substance lives, and a friendly ETF clause paired with a Market Price the supplier sets itself is not a friendly contract. The supplier contract comparison worksheet lays these clauses out side by side for two or three quotes. Rules on notices and fees vary by state and customer class and change over time; confirm current requirements with your public utility commission or counsel before relying on them.