Material Change & Swing: Understanding the Difference
Aug 6, 2014

Introduction:

Material change and swing are both related to changes in a Buyer’s natural gas and/or electricity usage, but their similarities end there.

  • Material change is intended to give Suppliers sufficient notice of any long-term changes to a Buyer’s load. It allows Suppliers to modify the contract price and/or be able to pass-through additional costs incurred to serve the Buyer.
  • Swing is intended to provide protection to Buyers from having to pay a higher price per therm on natural gas or price per kilowatt hour, on electricity above or below the contracted amount used on a monthly basis.

Please be aware that each Supplier may interpret or reference material change and swing in different ways.

Material Change and Swing: Understanding the Difference

Material Change

Material Change addresses significant changes that could impact usage over the long term. A simple way to illustrate material change is to imagine a facility that has added a 3rd shift to its operations.

  • A change in Buyer operations that adversely affects Buyer’s Delivery Class (the rate assigned by the utility to the Buyer.) By adding a 3rd shift, the facility increases its usage and therefore results in a change in Delivery Class. This rate change affects how the Supplier can bill the Buyer. Billing methods can impact pricing.
  • A change to Buyer’s usage pattern (the timing and frequency of consumption.) A Buyer’s usage pattern (a.k.a. load profile) is used for pricing and is assumed at time of contract. When these assumptions change, the pricing could change as well. Adding a 3rd shift distributes the demand for energy throughout both on-peak and off-peak hours instead of being focused primarily within on-peak hours.
  • A change to the Buyer’s specific parameters as listed on an offer sheet. An offer sheet details the contracts account(s), term, product, price, etc.  When any one of these specifics changes, such as the removal or addition of an account, this could be considered a material change.

If there is a material change in a Buyer’s actual or expected consumptions, or a material change to Buyer’s actual or expected usage patterns, a Supplier may seek to modify the contract price. Suppliers reserve the right to cancel an agreement if a mutually agreed upon price cannot be negotiated.

Consumption Change – The Buyer must promptly notify their Supplier in writing of any event or circumstance that is likely to cause a significant change to the load at any Location(s) (“Load Change”), such as:

  • New construction, renovation, remodeling
  • Facility replacement
  • Equipment modification
  • Planned closures
  • Applications for new construction permits
  • New environmental limits

Adverse Material Change – The Buyer needs to provide the Supplier ample notice prior to any planned business changes or other modifications to operations that may result in significant changes in load, such as the addition or removal of a facility.

Swing

Swing pertains to changes in contracted usage on short term basis.

Understand that swing products exist to help provide Buyers with a sense of security and budget certainty. A swing product is somewhat similar to an insurance policy in that it is meant to protect Buyers from unforeseen circumstances. In the case of natural gas, unforeseen circumstances result in having to consume significantly more or significantly fewer therms or kilowatt hours than estimated and contracted for as part of an agreement.

Adding swing allows the Buyer to purchase a prearranged quantity of natural gas and/or electricity at a set price with a percentage of variance built in to allow for changes in the Buyer’s monthly need for energy.

Swing is also known as bandwidth, or tolerance. It is the percentage of energy that can be used above or below contracted (estimated) quantities while still being billed at the contracted rate. This percentage and what providers are willing or able to offer ranges from 0% to 100%. (A 0% swing product means that no variance is allowed. A 100% swing product means unlimited variance.)

Using Too Much

Without a swing component in an agreement, the added costs could be much higher than expected.  Having to account for additional energy to get through a brutal winter or a long, hot summer can be much harder on a facilities bottom line if prices for additional energy that need to be purchased are at a higher market rate than the fixed contracted rate. Using more energy than what was contracted for on a 0% swing contract will mean a higher bill that month.

Using Too Little

One might think that by using less energy, you automatically spend less, right? That is not always the case. In fact, using less than the contracted amount can be extremely costly.

For example, a Village added a new ball-park to its facilities which were originally contracted for (i.e. – estimated to use) 5,000 therms of natural gas. The Village, recognizing that this change could impact their usage and potentially penalize them for a usage different from the estimated amount, the Village chose to contract with a Supplier offering a 100% swing product at a competitive rate. In fact, the Village ended up using only 15 out of the 5,000 therms contracted for.

So what happens when volumes are contracted for and not used?

The leftover volumes are cashed-out on the open market at whatever the going rate may be. If the Village had been on a 0% swing product (no variance allowed,) the village would have had to pay $21.24 per therm. That would have amounted to the Village having to pay a total of $318.60 for the 15 therms they actually used that month. But, because the Village opted for a 100% swing product, it only had to pay $6.20.

Eliminating Confusion

Many Suppliers claim to have swing built into their offers, but they could be referring to material change instead. Each supplier interprets swing and material change differently. The supplier of the Village that added the ballpark in the example above did not consider the addition as a material change; however, a different supplier easily could have.

The best way for Buyers to eliminate confusion is to always work with an independent energy consultant that is able to clearly analyze and define each component of an offer; one who can understand exactly what each term of an agreement actually means. Otherwise, a truly apples-to-apples comparison is impossible, and the buyer can end up paying more than necessary.

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