Holdover Rates, Explained

A holdover rate is the price a retail energy supplier charges a commercial account after its fixed-price contract expires and no new contract has been signed. It is typically a month-to-month variable rate set by the supplier each billing period from the spot wholesale market plus a margin that reflects the fact that the customer is not shopping. Depending on the contract, an expired account may instead be returned to the utility's default supply service. Either way the price is set after the fact, is not negotiated, and in our experience runs well above the fixed rate the same load could have locked with a few months' notice. It is the single most expensive outcome in commercial energy buying, and it is entirely avoidable.

Holdover gets mentioned on every page about contract timing and defined on almost none, so this piece defines it: what happens on the day a contract ends, how the replacement price is built, how to recognize it on a bill, and the mechanics of getting off it.

What the contract says happens

Every supply agreement has an end-of-term clause, and it does one of three things:

1. Holdover at a variable rate. The supplier continues to serve the account month to month at a price it sets each billing period. The contract language usually says something like "a market-based variable rate" or "the supplier's then-current month-to-month rate." The customer can leave on notice, often 30 days, with no termination fee. This is the most common outcome.
2. Automatic renewal. The contract renews for a new fixed term, often a year, at a price the supplier notifies the customer of shortly before expiry, unless the customer objects in writing within a window. The new fixed price is rarely competitive, and because it is fixed, leaving it early carries termination damages. This is the worst of the three for an inattentive buyer.
3. Return to the utility. The supplier drops the account and the utility picks it up on default service: the Price to Compare in Illinois and Pennsylvania, Basic Generation Service in New Jersey, Basic Service in Massachusetts, Standard Offer Service in Maryland. For larger accounts in several states default service is hourly real-time pricing rather than a fixed rate.

Which one applies is in the contract, and it is worth reading before the term ends rather than after. Our note on the contract clauses that cost you money includes the renewal clause for a reason.

How a holdover rate is priced

A fixed contract price was set by competition: several suppliers bid on the same day for a buyer who could walk away. A holdover price is set by one supplier for a buyer who, by definition, is not paying attention. The supplier takes the month's wholesale cost, adds the capacity and ancillary components at cost, and adds a margin. There is no reason for that margin to be thin, and it is not. The customer also carries full exposure to the spot market, so a cold January or a hot July arrives on the bill in full.

Default utility service is priced differently, by regulated auction rather than by a supplier, and for small accounts it is often reasonable. For large accounts it is usually hourly, which means the facility is paying the real-time price for every hour of the month, with no hedge at all. A single afternoon of scarcity pricing in PJM or ERCOT can cost more than a month of a fixed contract.

Either way, the comparison that matters is between what the account is paying and what the same load could have locked. Across the holdover situations we have cleaned up, the gap has generally been in the range of twenty to forty percent, and in a volatile month it has been much more. The timing note puts it bluntly: letting a contract lapse is the most expensive form of procrastination in commercial energy.

How to tell it has happened

Businesses sit on holdover rates for months because the bill does not announce it. The signs:

• The supply rate changed and keeps changing. A fixed contract shows the same cents per kWh or dollars per Dth every month. A holdover rate moves monthly, sometimes a lot.
• The supplier line reads "variable" or "month-to-month." Some suppliers label it; many do not.
• The supplier name on the bill changed to the utility. The account was returned to default service.
• A renewal notice arrived and nobody answered it. Check the accounts payable inbox for a letter from the supplier three to six months before the old end date.
• The contract end date passed. If nobody can say when the current contract ends, it has usually already ended.

Our guide to reading a commercial electric bill shows where the supply rate sits on the major utilities' formats.

Getting off it

The good news is that holdover is easy to leave; the bad news is that leaving takes a meter-read cycle. The steps:

1. Confirm the status. Pull the contract, find the end-of-term clause, and confirm whether the account is on supplier holdover, auto-renewed, or returned to the utility. If it auto-renewed into a fixed term, find the termination clause and the damages formula before doing anything else.
2. Give notice if required. Holdover usually requires 30 days; some suppliers require none.
3. Run a bid. A same-day competitive bid can be turned around in two to three weeks when the data is in hand, faster than a full procurement, because there is no timing decision to make: any fixed price is better than the floating one.
4. Enroll. The new supplier submits the enrollment to the utility and the switch takes effect at the next meter read, or the one after, depending on when in the cycle it lands. From the day of decision to the day the new rate applies is typically four to eight weeks.

During those weeks the account is still on the holdover rate, which is why the right answer to "we just found out we are on holdover" is to start the bid today rather than to wait for a better market.

Never getting on it

The prevention is administrative, not clever: a list of every account, its supplier, its contract end date and its end-of-term clause, with a reminder twelve months before each end date and another at six. That is the entire function of renewal management as a service, and it is the part of an engagement that stops the holdover problem from ever recurring. A business with one site can run the list itself. A business with forty sites, three suppliers and staggered end dates almost never does, which is how an account in a portfolio can sit on holdover for a year without anyone noticing.