Understanding Energy Contracts
Commercial energy contracts can be difficult to decipher in certain cases. When evaluating any tender, it is important to ensure that you are aware of all the charges within the offer; so that the comparison provides a true reflection of the ultimate cost to your business.
The Lowest Unit Rate is Not Always the Cheapest!
Whilst you may be drawn to an offer with the lowest unit rate (p/kWh) you could be surprised to find that there may be additional charges to factor in; which are not immediately obvious. In comparing any offers, it is useful to understand the various options that may be provided by energy suppliers. Having an awareness of these potential differences in energy contracts, will allow you to ask the right questions and secure the best value deal available.
Essentially there are three types of contracts:
Pass Through, Fixed (sometimes called Partial Pass Through) and Fully Fixed.
Pass Through
The price of energy is made up of several components; including a host of third party charges which the supplier will pass on to the consumer. These charges include the cost of maintaining the Transmission & Distribution Networks (Transportation Charges for Gas), Meter Operator Charges, Settlement Charges, and Data Handling Charges (DCDA). There are also ‘green’ levies such as the Renewable Obligation and Feed in Tariff.
These charges consistently increase annually, and although smaller increases may be absorbed by the supplier, they are usually ‘Passed Through’ to the end user. In this case: your business. All this means that opting for a contract of this nature can potentially leave you exposed to increases within the term of your contract.
It is important to acknowledge that the benefit of this approach is dependent on minimal increases to the Pass Through charges throughout the duration of your agreement. As a result, if you have a high tolerance for risk, a Pass Through contract maybe the most suitable for you.
Fixed or Partial Pass Through
As the name suggests, this option will provide a ‘Fixed’ rate for your energy, over a specified period of time. Typically this contract guarantees the unit rate (p/kWh) and the standing charge throughout the contract duration. The third party charges, mentioned above, will be set at the beginning of the contract and based on the situation at that time; whilst taking the duration of the agreement into account.
In some instances, there will be a designated threshold of tolerance for increases to the third party cost. Increases within this tolerance will be absorbed by the supplier. However, if the increase is above the stated level, then these costs may be Passed Through to the customer. This limited security will be stated within the supply contract, but suppliers choose to include this information in different ways. As a customer, the key thing is to be aware of the potential variations, in order to allow you to make a fully informed evaluation and decision.
In addition to the contract version above, some suppliers may provide contracts which are not fully inclusive of all third party charges and therefore can include a Pass Through element. Although the charges included in the agreement will be fully fixed, it will exclude certain taxes or levies. The additional cost and potential increases of this should be taken into consideration (this variation is also sometimes called a ‘Partial Pass Through’)
This type of contract is aimed at businesses who require a certain level of security in their energy costs, but can also accept a certain amount of risk. It is important to know that a fixed price relates to the unit rate and non-energy costs; it does not necessarily mean that you will pay the same regardless of your energy usage.
Fully Fixed
In this option both the energy and non-energy costs are included and fully fixed for the duration of the contract, providing maximum security. As a result, the unit rates and standing charge tend to be higher; as the supplier has to incorporate the risk of future increases to the third party charges.
Contracts of this nature are typically aimed at customers who require absolute budget certainty, effectively eliminating exposure to future increases. Despite offering the maximum level of security, such agreements would usually exclude new taxes or levies implemented after the contract was signed, as well as increases to CCL and VAT.