Pass-through Energy Contracts Explained
Pass-through v fixed – what’s the difference?
As a very general rule the smaller you are, and the less you consume, the more straightforward your energy contract.
Thanks to the Ofgem p272 mandate, the replacement of 05 – 08 meters with “smart” Half Hourly meters, a lot of new business has woken up the option of a pass-through contract. So what is a pass-through contract?
Pass-through contracts explained
If you are to imagine, for a moment, the price of petrol at your local garage forecourt. The price per litre is made up of many things, not just the cost of the fuel itself. Similarly, your electricity tariff is made up of numerous things with the actual cost of the power being just one part.
SSE state that in a typical energy contract the non -power element of the bill, known as non -commodity costs, can be as much as 55%. The percentage might surprise you but it’s made up of elements such as the infrastructure costs to get the power to your premises and the levies and taxes to secure future generation.
A pass-through contract splits your bill in two between the “fixed” power element, which you pay throughout your term and these non-commodity costs, which may vary over time. The basic premise is that the supplier passes these non-commodity costs direct to you and the risk that these may increase over time. With a pass-through, you take the risk of these non-commodity costs increasing.
You also take the risk of being exposed to triad charges. Triads are how the National Grid charges for network (TNUoS) use and are calculated based on each meter’s average usage. This is calculated by measuring across three periods, between November and December. If you do not actively manage your usage during these triad periods you may see significant increases in your costs.
A fixed contract does what it says on the tin; all the elements are set out for the duration of the contract. If either of the elements increases or decreases, then it’s the suppliers’ risk and you don’t pay anything further.
So what are the pros and cons of each type of contract:
– The consumer takes on more risk so it should lower costs
– If you can manage your usage patterns to avoid triad periods, they can be beneficial
– You can benefit if costs fall in in the future
– No budget certainty
– Much more complicated
– If you can not avoid expensive times, you will pay the price with higher charges
– Previous costs are no guarantee of future costs. The energyst is predicting non-commodity costs to increase by 15% to 20% over 2018. Increases in Triad charges alone have gone up by 80% over the last five years and are expected to increase by up to 40% to 2020.
– Great for budget certainty
– Easy to understand and no need to reconcile
– Supplier absorbs all the risk
– Much less complicated
– Supplier takes the risk & it’s built into the unit rate
– You do not benefit if costs fall. Looking at the predicted increases above this looks increasingly harder to realise.
Summing it all up
It’s all a question of risk and simplicity
If you are risk adverse and favour low administration, simplicity and budget certainty, then a fixed contract will deliver all these things.
If you can tolerate risk, are happy with no budget certainty and want more involvement, a pass-through may help you lower your electricity spend.
Pass-through contracts by their very nature can be difficult to understand, and which elements are fixed and classed as pass-through can also vary between suppliers.
The complexity can also open the door to unscrupulous energy brokers to profit from any confusion.
Pass-through contracts can be very advantageous if you fully understand how to use them to your advantage, but they can also cost you a lot more, if not correctly managed.
At troocost.com we do not hide our fees in your unit rate and get the same flat fee from every supplier that accepts your supply. We are, therefore, truly independent and make sure you get the very best deal. This, of course, means making sure you fully understand your contract.
Why not use our benchmarking service today. We will analyse your usage and current contract before supplying you with the best prices the market has to offer. No funny business or hidden costs just straightforward pricing direct from the suppliers.
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