What is a Change In Law Clause and Why Should I Care?

If you buy energy for your organization, you’re probably used to some pretty complex language in your energy contract. One particular phrase carries a significant impact. If you aren’t familiar with the concept of the “Change in Law Clause” in energy contracts, it’s time to start paying attention.

A Change in Law Clause is a section appearing in most energy supply contracts allowing a supplier to pass through to you incremental charges that are caused by changes in regulation, rules, and laws.  If you’re like most corporate energy buyers, you may not pay much attention to a Change in Law language in your contract–until you’re hit with substantial and unexpected charges on your energy supply bill.  Given ongoing policy-making in the energy industry, Usource expects Change in Law pass-through charges to be prevalent for the foreseeable future.

Are Change in Law Clauses Necessary?

While annoying, Change in Law clauses are a necessary part of energy contracting. In most energy contracting options, suppliers are fixing all or some components of your energy price.  In order to do that effectively and profitably, suppliers must hedge the risks that could cause the cost of your energy to increase. At the same time, policymakers are actively shaping the electricity markets, in particular, to move towards zero-carbon solutions and to maintain reliability. Future regulatory and policy changes are unknown but can have a significant impact on energy costs.  In order for consumers to get simplified products to hedge their energy price risk at reasonable rates, there needs to be Change in Law language in contracts.

Change in Law Clauses Can Vary From Supplier to Supplier

Some energy suppliers will have relatively broad Change in Law language in their contracts and take a relatively liberal interpretation of what changes constitute Change in Law. With these suppliers, you might see more aggressive upfront price offers, but understand the risk that future changes could be passed through is greater than with suppliers that have narrow Change in Law language. In addition to language differences, interpretation of a regulatory or policy change can vary by the supplier; one supplier might view it as a Change in Law and pass through a new charge while another supplier might not view it as a Change in Law at all. With customers contracting for longer terms and policy-making active in most markets, customers should expect to get some Change in Law pass-through charges regardless of the supplier.

How To Handle a Change in Law Clause in Your Energy Contract

Given the complexities of the energy market and the simple fact that technologies, regulations, and policies continue to evolve and change, we recommend you look to a trusted energy advisor (like Usource) to help you understand contract pricing and terms from a  supplier, as well as any change notifications you might receive that affect your energy bill and budget. In order to make a sound procurement decision, contract terms and risks should be weighed, as well as prices – something an experienced Usource energy advisor can help with.

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About the author

Scott MacDonald

As Usource's Managing Director, Scott brings 25+ years of experience in the energy industry to the Usource Team. He is a recognized expert in energy economics and consulting. He holds an MS from MIT and a BA in economics from the University of New Hampshire.

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