What is the difference between a fixed and pass through electricity contract?

There is no one size fits all when it comes to business electricity contracts in the UK. There are a wide array of electricity consumers, ranging from the small corner shop to the large factory assembly line. Consequentially there are a wide array of contracts designed to suit the varying demands of UK business consumers. Generally the smaller the electricity demand, the more straight forward the contract. Half Hourly electricity clients, the larger consumers, are already familiar with the choice between a traditional fixed, versus the more complex pass through contract. Thanks to Ofgem’s P272 mandate, the launch of AMR devices for all Maximum Demand 05 – 08 Non Half Hourly meters, the fixed versus pass through dilemma will become more common for the ‘mid-sized’ business consumer in the future.

It is tough to know which type of contract is correct for your needs, so here are some basic thoughts to help you decide. It is important to note, that contract Terms and Conditions differ from supplier to supplier. What one supplier refers to as fixed may differ to another supplier’s definition. Comparing prices for yourself will become more and more problematic, as you will probably end up comparing apples to oranges since offers can differ significantly. The problem is exacerbated by the fact that it is not unheard of that staff at some suppliers do not even fully understand what is included and what is excluded. In addition, the situation is constantly changing, so you have to keep up to date with changes to ensure a genuine comparison.

Both fixed and pass through contracts have their merits, the below plain language advice is designed to help you to decide with option is best for your organisation:

Fixed Electicity Contract: You agree to rates and charges upfront.

Fixed Pros:

  • Great for budget certainty.
  • Great for ease of administration, no need to reconcile, or work around fluctuating costs.
  • Supplier absorbs all the risk.
  • Great if you anticipate rising future commodity and non-commodity costs.
  • Good if you have to pass on costs to tenants/clients, enables you to plan ahead.
  • Less complicated.
  • Advantageous if consumption is expected to drop in the future, and there is no volume tolerance penalty, you can secure costs based upon a larger historic consumption, benefiting from scale of economies.

Fixed Cons:

  • Supplier absorbs the risk, which increases costs.
  • Do not allow you to take advantage if costs fall in the future.
Pass Through Electricity Contract: You agree to some, not all rates and charges upfront, with the remainder being ‘passed through’ to you at cost.

Pass Through Pros:

  • Consumer takes on more risk, which lowers the costs.
  • Enables you to benefit if costs fall in the future.
  • Great for clients who can shift usage patterns to avoid ‘expensive times’ such as lowering consumption during M-F 16:00 – 19:00 November – February.

Pass Through Cons:

  • No budget certainty.
  • More administration burden as costs fluctuate.
  • More complicated.
  • Cost estimates are no guarantee of future costs.
  • If you consume energy during ‘expensive times’ you will be subject to very expensive charges.
In a nutshell…

If you are risk averse take the simple route, opt for the low stress, low administration burden that is a fixed contract and comes with the benefit of peace of mind.
If you can tolerate risk, do not require a firm budget, and are prepared for more involvement, consider a pass through contract as a means to potentially lower your electricity spend.

When considering pass through type contracts, be sure to read the fine print of a contract, or better yet, save yourself a lot of time, work and risk of error by engaging with a reputable TPI in order to make a more genuine like for like comparison. Do not get frustrated by the complexity of these contracts, if it was easy there would be no TPI market, or Pass Through support teams within the suppliers. The fact that these exist demonstrate just how complicated this process has become. With electricity spend being a major budget item for most businesses, surely it is better to engage with someone who negotiates these contracts on a daily basis, than to rely on yourself, who will review such contract options once a year or every couple of years!

If you would like any additional information on pass through contracts, or have any questions, please CONTACT US at Direct Power.  We are always here to help!