Why electricity suppliers add clauses regarding early termination fees to fixed-price contracts?


Where a customer concludes, for instance, a fixed-price contract for one year, the seller, in turn, makes long-term deals on the market. The seller cannot cancel these deals, even if the customer later decides to terminate the contract.

For example, if a customer signs the contract with a seller at the time when a fixed-price yearly contract provides for the price of 5.5 cents/kWh, the seller undertakes purchase obligations on the market that are equal to the estimated consumption volumes of that customer. This means that the seller also purchases electricity at the same price for the entire next year.

If in the middle of the year the market price for electricity falls, for example, to 3.5 cents/kWh, and if the customer decides to terminate the contract early, the seller has no option but to terminate his part of the contract. The only option for the seller is to buy electricity at 5.5 cents/kWh, and sell it back on the exchange at the current market price of 3.5 cents/kWh. As a result the seller loses 2 cents per kWh.