Here's a fun fact for the deal team: in a typical mid-market industrial acquisition, the target's energy contracts will sit somewhere between "looked at briefly" and "not diligenced at all" during the transaction. The QofE team pulls the utility bills to tie out EBITDA. The commercial diligence team notes the energy spend as a percentage of COGS. The legal team checks for material contracts. And that's it. Nobody actually reads the energy supply contract.

This is fine 85% of the time. The other 15%, it costs the buyer real money — sometimes millions — because there's something weird in the contract that nobody caught. Here's what a thorough energy diligence workstream looks like, and why it belongs in your standard process.

Why This Matters at Close

Three things live inside a target's energy arrangements that can move the deal economics materially:

• Hidden liabilities. Early-termination fees, bandwidth true-up obligations, renewable compliance obligations, and supplier payment disputes that haven't made it to the data room.
• Embedded value. Favorable legacy contracts, demand response enrollments, tariff exemptions, and curtailable-load agreements that should be preserved post-close.
• Baseline mispricing. Energy spend in the QofE is treated as a fixed cost, but it might actually be 20-30% above market — meaning the buyer has a day-one EBITDA opportunity that doesn't show up in the model.

Each of these is worth checking. Collectively, they're worth a dedicated diligence workstream that takes two to three weeks to run in parallel with the rest of the process.

The Contract Review

Pull every active supply contract — electricity, natural gas, anything else. Don't trust the data room summary. Read the actual contracts. Here's what to flag:

• Term and expiration: When does each contract end? A contract expiring 90 days post-close is a time bomb. A contract running 24 months past your expected exit is an anchor on the next owner.
• Early-termination provisions: What does it cost to get out of the contract if the buyer wants to consolidate supply across a broader portfolio? Some ETFs are nominal. Some are punitive — we've seen contracts where termination costs exceed a year of supply expense.
• Bandwidth and usage tolerances: Is the contract structured around a load profile that no longer matches the business? A portco that shut down a production line last year may now be outside the contract's usage band, exposing the buyer to ugly true-ups at month-end reconciliation.
• Pass-through mechanisms: Which charges are fixed and which float? Capacity, transmission, ancillaries, REC compliance — all of these can be structured as fixed or pass-through. "Fixed" contracts with everything passing through aren't fixed.
• Change-of-control language: Some supply contracts require supplier consent on a change of control. Miss this and you create a day-one supplier relationship problem that didn't need to exist.
• Credit and collateral terms: If the target was posting collateral to the supplier (LOC, cash deposit, parent guarantee), that obligation doesn't vanish at close. Confirm whether the buyer's credit supports the existing terms or whether the supplier will demand more collateral post-close.

The Bill Audit

Pull 12-24 months of utility bills across every meter. Then have someone who knows what they're looking at go through them. You'd be amazed what surfaces:

• Wrong rate schedule: The target is on a general-service tariff when they qualify for a manufacturing tariff. Often worth 5-10% of annual electric spend.
• Sales tax on exempt usage: The target is paying sales tax on electricity used in production when state law exempts it. Refund claims can go back 3-4 years depending on the state. Typically six figures for industrial targets.
• Demand ratchet mispricing: A single abnormal demand reading years ago still driving the monthly capacity bill. Once you flag it, the utility will typically correct going forward — and sometimes retroactively.
• Meter errors: Transposed multipliers, incorrectly configured CTs, billing on estimated reads for months at a time. More common than you'd think.
• Unrecognized riders and surcharges: Line items that should have terminated years ago but are still on the bill. Pure overbilling.

A rigorous bill audit on a $3M-annual-spend industrial target usually finds 3-8% in recoverable overcharges plus ongoing savings. This either becomes a purchase price adjustment, a seller-side escrow, or a day-one value capture for the buyer — your choice.

The Market Benchmark

This is the piece that's easiest to skip and hardest to replace post-close. Before signing the deal, benchmark the target's current supply rates against current market rates in the same zones. If the target is locked into a contract priced 25% above today's market, that's material information — it affects your day-one EBITDA, your exit positioning, and potentially your purchase price.

The benchmark also tells you something about the selling management team. If the target's energy contracts are 5% above market, management is doing normal work. If they're 30% above market, management hasn't been paying attention — and you can make reasonable inferences about the rest of the G&A function.

Transferability and Assignment

One of the more tedious but consequential parts of energy diligence is confirming that every contract and every regulatory enrollment can be transferred or reassigned at close. This includes:

• Supply contracts (electricity and gas)
• Demand response program enrollments
• Net-metering or distributed generation interconnection agreements
• Sales-tax exemption certificates
• Renewable energy certificate (REC) purchase agreements
• Utility account ownership and tax-ID alignment

Each of these has its own paperwork, and the buyer's operations team will spend four months chasing them post-close if the deal team doesn't tee them up in advance. Worse, a missed assignment can cause a supply interruption or the loss of a tariff benefit on day one.

Embedded Value Worth Protecting

Not every energy finding is a liability. Sometimes the target has embedded value that needs to be preserved:

• Legacy favorable contracts: A three-year supply contract signed during a low-price window that's now meaningfully below market. Don't terminate it early. Ride it out.
• Demand response revenue streams: If the target is enrolled in capacity-market DR programs, confirm the enrollment can transfer. $100K-$500K of annual revenue is worth preserving.
• Curtailable-load tariff discounts: Some utilities offer steep discounts to customers with interruptible load agreements. Preserving these requires active management — the tariff election usually has to be re-certified periodically.
• On-site solar or generation offtake agreements: If the target has behind-the-meter solar or a PPA, diligence who owns the asset, the remaining term, and the economics. These arrangements can be value-accretive or value-destructive depending on structure.

How to Integrate This Into Your Process

Energy diligence should run as its own workstream, owned by a specialist, in parallel with QofE and commercial diligence. Typical timeline:

• Week 1: Contract inventory, utility bill pull, data-room review
• Week 2: Bill audit, market benchmark, contract-language review
• Week 3: Findings report, purchase-price-adjustment recommendations, post-close action plan

The deliverable the deal team actually needs is a one-page findings memo with three sections: liabilities to reflect in the deal, value to preserve at close, and day-one opportunities to capture in the first 100 days. That document belongs in the IC memo alongside the QofE summary.

Our Recommendation

For any target with $500K+ in annual energy spend, this workstream pays for itself many times over. For targets above $2M in annual spend, skipping it is malpractice. The diligence cost is nominal. The findings are consequential. And the buyer who runs this process — every time — builds an edge that shows up at exit five years later as a cleaner, better-priced, better-documented energy cost structure that the next buyer's diligence team has no reason to object to.