A percentage value that can either increase or decrease a contracted value over time or for a given market condition.
Pros
Reflects future changes to market conditions
Cons
They can be contractually mandated into effect even if the market conditions don’t call for it. For example, a solar PV power purchase agreement rate with an annual escalator of X% can result in an electric rate higher than the current market rate.
Real Talk
Escalators are hard to get right and generally we like to avoid them. Anyone considering signing a contract with an escalator value should be very cautious.