Early Termination Fees: What to Know Before Breaking a Commercial Energy Contract

Early termination fees (ETFs) may feel like a penalty, but understanding how they work before you sign is the best way to avoid surprises. These fees are penalties charged by energy suppliers if you decide to break a commercial energy contract before the agreed term ends. Why? Suppliers often secure energy in advance through hedging strategies to manage price risk. If you end your contract early, they may need to unwind those commitments, which can create losses. Early termination fees are designed to cover those costs.

How Are Early Termination Fees Calculated?

Typically, an early termination fee calculation involves:

• Remaining Contract Term: The longer your contract has left, the higher the potential fee. This covers the supplier’s costs for the energy they expected to sell you over that time.
• Market Price Difference: Suppliers calculate the difference between your contracted rate and current market prices for energy. If market rates rise, your fee could increase. If they fall, your fee may shrink—or in rare cases, be waived.
• Contract Terms: Some contracts set a flat fee for early termination, while others use a formula tied to market prices and remaining usage.

When Do Early Termination Fees Apply?

Most commercial contracts include early termination clauses, so it’s crucial to review your contract before committing. Smaller businesses (typically using 5,000–25,000 kWh per month) may face lower—or no—termination fees. Larger users, like manufacturing plants, hospitals, or office towers consuming 50,000+ kWh per month, are more likely to face significant costs.

Early termination fees typically apply if you:

• Switch suppliers during a fixed-rate contract.
• End your contract early for reasons not covered by exceptions in your agreement, like canceling without transferring the contract or moving to a new site improperly.

You might avoid or reduce fees if:

• You substitute a new site that meets the contract criteria and remains within the same utility territory.
• You close or sell your business and provide the required proof and notice according to your contract.

Always review clauses about assignment (transferring the contract) or site substitution (changing locations under the same contract). These details can make the difference between paying a steep penalty and avoiding one altogether.

Why Understanding Early Termination Fees Matters

Early termination fees can be a significant unexpected cost if you’re not prepared. Many businesses worry about being locked into long contracts, but the best protection is knowing the terms before you sign.

Read your contract carefully, including any plan summary documents, to understand fees and exit options. Ask your supplier about early termination fees, how they’re calculated, and any possible exit options.

At Catalyst Power^®, any early termination fee is based on clear factors—your remaining usage, market price differences, and contract length—and fully outlined in your agreement.

Navigating Contract Terms

Taking time to review your contract about potential penalties puts you in a stronger position if your business needs to make a change.

Understanding your contract upfront can save you from costly surprises down the road. If you’d like help reviewing terms—whether it’s early termination fees or pricing options—our Energy Experts are here to guide you.