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Two different ways to structure energy contracts, and the importance of experienced legal counsel

Last time, we began looking at a state bill that would rework the regulatory scheme governing the bidding and negotiation of renewable energy projects. As we noted, the bill would put Duke Energy in charge of the bidding process for these projects, which is a cause of concern to private energy developers, who have been increasingly shut out by the utility.

Contract negotiation is an important aspect of doing business in any industry, including the energy industry. Generally speaking, energy contracts are of two different types: fixed procurement and flexible procurement. Fixed procurement contracts are those in which energy companies agree on a price for gas or electricity, and fix that price for the duration of the contract. Usually, the contract length is one to three years, but this can vary. 

The benefits of fixed procurement are that it allows energy companies to know for sure how much they are paying for gas and electricity and they fix the contract length for a longer period of time. This gives an energy company certainty about how much they will spend over time.

Flexible procurement contracts are those in which energy is purchased wholesale in smaller units throughout the duration of the contract. This approach has certain benefits over fixed procurement. First of all, it allows an energy company to determine how much energy they will purchase and when. This allows companies to take advantage of fluctuations in the market price of gas and electricity. Flexible procurement can also result in lower risk premiums.

Carefully negotiating the terms of energy contracts is just as important as determining what type of contract is best for energy transactions. Certainly, as well, energy contracts need to be in compliance with any applicable state and federal law. Working with an experienced attorney can help energy companies, and businesses in other industries, not only to ensure they are in compliance with any applicable legal requirements governing their transactions, but also that they carefully choose the contract type and terms which best meet their needs and reflect their business interests.

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