What is force majeure in energy contracts? – TMT

March 9, 2021 – What is force majeure in energy agreements? In this video, CEO John Nania explains how this contract language impacted Texas energy consumers after the grid failure in February.

Video Transcript

Hi! My name is John Nania. I’m the Chief Energy Officer here at Nania Energy Advisors. I’ve got about 30 years of experience in the energy market, and today the reason we’re talking to you is because in those 30 years, we’ve never witnessed the calamity that is what happened in Texas in the month of February.

So we’re going to talk a little bit about that and how it can affect you and what you can do to prevent any kind of harm from coming to you in the future.

What happened in Texas?

In Texas, we had record cold that shuttered gas supply and made it impossible for electric generators to create electricity. And so effectively, they had an abundance of demand and not enough supply on both gas and electric. The end result is that we had priced that skyrocketed to levels unprecedented in the energy market.

So although this happened in Texas, the effects are being felt elsewhere throughout the country.

Why are we talking about this? Because, ultimately, it’s going to affect how business is done in the energy business going forward.

How can clients with a fixed price be so hurt by this?

This is one of the questions that’s being asked right now. And to answer that, we have to look at what’s in the agreement.

If someone has a fixed price — you’ve contracted for energy for all of your consumption, hypothetically — you should be able to rest assured that in almost all circumstances that’s exactly what you should get.

So what went wrong down there? Mother Nature.

What is force majeure?

In every energy agreement, there’s a clause called force majeure or acts of God. They’re about the same. Acts of God contemplate events that happen in nature that are outside of everybody’s control.

Force majeure incorporates those acts of nature as well as contemplates that there are acts that man created. Think about war, riots, civil unrest, things like that.

In this case, it might be that there was some legislative or regulatory interference in the marketplace that caused this. But regardless, it’s outside of either the supplier’s or the customer’s control.

So when force majeure or an act of God is declared, it relieves the obligation of the parties to fulfill their obligations under the contract and throws everything up in the air.

No one in the supply community likes to declare force majeure.

It’s an evil word for many, but it is what it is. It’s the first time since 2013 or 2014 that it’s been called.

To the extent that it happened in Texas, we’re seeing that in other markets prices rose dramatically. And depending on where the supplier purchased their power or gas for their customers throughout the country, they may have passed along some of those costs to their customers.

So this is a time to be incredibly keenly tuned into your energy bills to look for discrepancies and to challenge whatever is behind the numbers this month. This will help you be better apprised of what happened. And if there is some opportunity to learn from this or to do a better job of hedging yourself, you can do that going forward.

Why is this important to you?

To ensure that this calamity that hit the users in Texas doesn’t happen to you, here are a few tips to keep in mind.

  1. First, it’s important to always use a good supplier that’s well capitalized. You want to make sure that if something like this happens, they’re not going to be in a position where they can’t fulfill their obligations — even if they wanted to.
  2. Second, it’s time to check the fine print in energy agreements about force majeure or acts of God or material change rules or language.
  3. And third, it gets back to the intent of the company that you’re buying from. They may have the best intentions. They may have good finances. But at the end of the day, if they’re not really committed to taking care of their customers, then you may have a problem.

 

So I hope this is all beneficial! And should you need any help with your (in particular) February invoices, please feel free to give us a holler. Thanks!

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