To best understand pass-through contracts, you first need to be aware that your electricity unit rates contain both commodity, and non-commodity charges.
The commodity charge is the cost of the electricity itself, whilst non-commodity charges relate to the additional costs associated with the delivery of electricity to consumers.
There are a wide range of non-commodity costs. They cover transportation, distribution and network charges, as well as several government taxes and levies aimed at reducing carbon emissions and encouraging renewable energy production.
Since there are a range of different products and contract options to choose from, it’s important to know what each one contains. It’s particularly important to know which charges are included in your unit rates, and which are ‘passed-through’ as a separate charge.
A trick unscrupulous brokers sometimes use is to sell pass-through contracts, which exclude certain charges from your unit rates, without disclosing that the additional charges will be billed separately.
In this situation, the broker’s rates can seem extremely cheap. That is, until you receive your first bill, and you notice the additional charges.
Are ‘Pass-Through Contracts’ More Expensive?
No. They involve an element of risk, but for a large number of business they’re hugely beneficial. In fact, in many cases they’re significantly cheaper than a fully fixed contract.
The reason being that certain non-commodity costs are government and other third party
mandated. The supplier has to pay these charges, which they then recover from the customer, often including them as part of their unit rates or standing charges.
Because some of these costs can change throughout the term of a contract, whenever a supplier offers a ‘fixed’ rate contract, they do so knowing that there is a risk that some of their own costs may go up.
To allow for this risk, they can include an additional margin into your rates to act as a buffer, to protect themselves against unexpected cost increases.
A pass-through contract means that rather than adding a buffer, the supplier bills you at the exact rate they’re charged. They ‘pass-through’ the charges at cost.
Under such agreements, you accept that there’s a risk that certain charges may increase mid-contract, but you also know that you’ll never pay more than the actual cost imposed on the suppliers.
Know What You’re Signing
The instances where they can end up significantly more expensive than a fixed contract are often a result of an unethical broker taking advantage of the fact that the unit rates appear cheaper, and using it as an opportunity to add a huge margin for themselves.
Tip: When a broker recommends a contract, request a copy of it and ensure that they send you all of the pages, not just the signature page. That way, you can review it and see if there are any ‘pass-through charges’ before committing to anything.
The range of different energy contract options available can be confusing. If you’re unsure of anything, and would like some help, contact us.
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