Why do electricity and gas contracts have early termination fees?

Many people ask why electricity and gas contracts have early termination fees?  There is a very good reason.  First look at it from this perspective:  the energy supplier is guaranteeing that your contracted price will never rise, no matter what, even if a disaster strikes the energy supply infrastructure.  They are protecting themselves with a financial instrument that requires that you buy the agreed amount of energy during your contract term.  If you don’t…as in early termination…they still have a financial obligation to make good on using that energy.  Would it be fair, from a purely ethical perspective, to walk away from that transaction?  If prices in the market go down slightly and you find your contract price a bit higher, remember: you are protected from price increases for the term of the contract.  You will also find that over the entire life of the contract, you will likely come out ahead and save money.  Another analogy I like to use:  if you pay $10,000/year for fire insurance on your business, do you feel like you wasted your money if you didn’t have a fire?  Of course not!  Contracting electricity and gas is like getting an insurance policy to protect your budget!  You have absolutely no way to accurately budget your electricity and natural gas costs without a supply contract.

If your contract does not have any cancellation fees, believe it or not, it probably doesn’t do a very good job of protecting your price exposure.  You can’t have your cake and eat it too, as they say!

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