Terminating an energy sales contract in the context of rising electricity prices – is it worthwhile?

However, the decision to terminate an electricity supply contract should not be made solely on the basis of fluctuating prices. It requires an analysis of the contractual terms and the applicable legal regulations. The financial implications of terminating the contract must be carefully assessed.

Termination of an electricity supply contract and contractual penalties

Terminating a contract before its expiry date may have serious financial consequences. Many contracts contain clauses regarding contractual penalties for early termination of the agreement.

The possibility of terminating the contract depends primarily on its content. The provisions regarding the rules for terminating the contract must be carefully analysed: the form of notice, the notice period, and the contractual penalties imposed in connection with the customer’s termination of the contract. The amount of the contractual penalty will be calculated based on the formulas contained in the contract or an annex. The amount of the penalty usually depends on the amount of unused energy and the remaining term of the contract.

Types of energy supply contracts and contractual penalties

Electricity supply contracts can take various forms, which directly affects the scope of the parties’ rights and obligations, as well as the possibility of terminating them. The term for which the contract was concluded is of key importance, as it defines the financial consequences associated with terminating the contract.

• Contracts concluded for an indefinite period – Under energy law, the customer may terminate the contract without incurring costs. The customer terminating the contract is only required to cover the costs of the energy consumed and the costs of the services provided in relation to its transmission or distribution.
• Fixed-term contracts – Termination of a fixed-term contract may entail the payment of a contractual penalty. Under the current provisions of the Energy Law, the costs associated with terminating the contract must be directly specified therein. Compensation or a contractual penalty may not exceed the amount of direct economic losses incurred by the energy company as a result of the customer terminating the contract. These provisions apply to domestic customers, and to end-users who are micro-enterprises or small enterprises to the extent that they consume electricity for the purposes of their core business.

It follows from the above that, in the case of contracts concluded for an indefinite period, the energy supplier may not impose contractual penalties on the customer.

Terminating an energy contract before its expiry – what you need to know

Terminating an energy supply contract before its expiry may have serious financial consequences. Fixed-term contracts contain provisions regarding contractual penalties. Before terminating the contract, you should carefully analyse its content to calculate the potential amount of the contractual penalty that the energy company may impose. It is worth noting the provision stating that the contractual penalty cannot exceed the direct economic losses incurred by the energy supplier as a result of the contract’s termination. The concept of direct losses is not defined in the Act, which may give rise to disputes between the customer and the energy supplier. Where the energy supply period has not yet commenced, it is difficult to find a basis for calculating a contractual penalty on the basis of direct losses, as these have not yet been incurred.

In the context of rising energy prices, it is worth bearing in mind that terminating an energy supply contract without simultaneously entering into a new contract with another supplier may result in the customer being subject to so-called ‘reserve supply’. This form of energy supply usually involves significantly higher rates than those provided for in standard market contracts. As a result, instead of saving money, the customer may incur additional costs that will place a significant strain on their budget.

Termination of an energy supply contract – SUMMARY

The decision to terminate an energy supply contract due to rising electricity prices should be taken with great caution. Although it may seem that unilaterally terminating the contract will avoid further costs, in practice it can lead to serious legal and financial consequences – including contractual penalties, claims for damages, or the costs of purchasing energy on market terms, which may prove less favourable than the current ones.

A thorough analysis of the contract’s terms, applicable legislation and market realities is crucial here. It is also worth considering alternatives such as renegotiating the contract’s terms before making a final decision to terminate it.

If you are considering terminating an electricity supply contract, we encourage you to contact our law firm, which specialises in energy law. We can assist with assessing the risks and opportunities, as well as support you in any negotiations or disputes with the energy supplier. This enables us to develop a solution that safeguards both your legal and financial interests.