If your business is in a state where energy is deregulated, you might have the option to choose a retail energy supplier. While this can give you more control over your energy costs, you may encounter an energy pass-through charge.
These charges are additional costs that might appear on your energy bill. Sometimes, they are legitimate and based on the structure of your energy contract. Other times, they could be mistakes—or even scams.
This article explains energy pass-through charges, how they work, and what to look for. By the end, you’ll know whether passing through certain charges could benefit your business or if you’ve been unfairly charged. Understanding this can help you make informed decisions and avoid potential energy billing scams.
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What Are Energy Pass-Through Charges?
Energy pass-through charges are extra fees that your energy provider may add to your bill. These charges come from the costs your provider pays in the wholesale energy market and are then “passed through” to you as the customer. These charges can sometimes be planned and listed in your energy contract, while they might be unexpected at other times. It all depends on the terms of your agreement. Let’s look at how energy suppliers add these pass-through charges to your bill and what they mean for you as a customer.
Examples of Pass-Through Costs in Electricity Bills
Reactionary (Unexpected) Costs
- Regulatory decisions or changes in law: If the government changes a law or regulation, your electricity supplier may have to adjust your price to cover new costs.
- Weather: Extreme temperatures, like a very cold winter or hot summer, can increase demand or affect supply, leading to higher costs.
- Material deviation: If a customer significantly changes the amount of electricity they use over time, suppliers must adjust for this unexpected shift in demand.
Ancillary (Expected) Costs
- Capacity: This cost helps ensure there’s enough power available during peak times, like hot afternoons when air conditioners are running at full blast.
- Network Integration Transmission Services (NITS): These charges cover the costs of moving electricity over the grid, which grid operators manage.
- Balancing: This reflects adjustments when electricity use doesn’t match the predicted amount. Depending on your grid operator, it may appear as a charge or credit.
- Congestion: These costs arise from getting power to densely populated areas where the grid is busier.
- Reliability Must Run (RMR) is a fee to keep the grid reliable during emergencies, such as extreme weather when power demand spikes.
| Expected Costs (Ancillary) | Unexpected Costs (Reactionary) |
|---|---|
| Capacity Charges | Weather Events |
| Transmission Fees | Regulatory Changes |
| Balancing Fees | Market Price Surges |
| Congestion Costs | Material Deviations |
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What You Should Know About Pass-Through Costs
How Much Do Pass-Through Costs Impact Your Energy Bill?
How Can You Manage These Charges?
- Energy Efficiency: Many businesses already take steps to save energy, like reducing usage during peak times. This also helps lower pass-through costs.
- Regular Audits: Reviewing your energy bills regularly can help you track these charges and identify ways to control them.
What Should You Look For in an Energy Contract?
When comparing energy contracts, make sure you’re getting a fair deal by following these tips:
- Compare Apples-to-Apples: Ensure the electricity capacity pricing is clear and consistent.
- Check Contract Terms: Avoid contracts that allow unexpected price changes, such as fees not linked to law changes.
- Trust the Experts: Working with a trusted energy advisor can help avoid risky or unclear terms in the agreement.
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How to Verify Whether a Pass-Through Charge Is Legitimate
Pass-through charges can be a legitimate part of a commercial energy contract, but businesses should understand what they are paying for and whether the charge is supported by their agreement. A higher-than-expected charge does not automatically indicate an error, but unexplained or inconsistent charges should be reviewed.
Check the Energy Contract
Review the pricing section of your electricity or natural gas contract to determine which costs can be passed through separately from the supplier’s quoted energy rate. Look for provisions covering transmission, capacity, congestion, balancing, regulatory costs, and other applicable market or utility charges.
Identify the Underlying Cost
Ask the supplier what specific cost the pass-through represents. The charge should have an identifiable basis, such as a transmission cost, capacity obligation, market adjustment, or other cost permitted under the contract.
Review the Calculation
Compare the charge with the applicable rate, billing period, usage, demand, or other factors specified in your agreement. Some pass-through charges are not based solely on total energy consumption, so reviewing the calculation is important when an amount changes unexpectedly.
Check for Supplier Markups or Adders
Find out whether the amount represents the underlying cost alone or includes a supplier markup, adder, or administrative charge. These terms can vary between energy contracts, so businesses should review the pricing structure before comparing offers from different suppliers.
Request Supporting Details
If a charge cannot be reconciled with your contract or invoice, ask the supplier for an itemized explanation. This may include the applicable rate, calculation method, billing period, and underlying cost used to determine the charge.
When to Review a Pass-Through Charge
A closer review may be appropriate when:
- A new charge appears on your bill without a clear explanation.
- A pass-through amount changes significantly.
- The charge does not appear to match the contract terms.
- The calculation cannot be verified.
- A supplier cannot identify the underlying cost.
- A fixed-rate agreement includes an additional charge that was not clearly explained.
Understanding the relationship between the contract terms, underlying energy cost, calculation, and final billed amount can help businesses identify billing discrepancies and make better-informed energy purchasing decisions.
Types of Electricity Pass-through Costs
Electricity bills for domestic customers include pass-through costs, which cover the expenses of delivering electricity to homes. These costs are regulated and not set by electricity suppliers.
They fall into two main categories:
1. Distribution Charges (DUoS – Distribution Use of System)
- These charges cover the cost of delivering electricity from the transmission network directly to homes.
- NIE Networks, the company responsible for maintaining and operating the electricity distribution infrastructure in Northern Ireland, applies these charges.
- The cost includes expenses related to maintaining power lines, substations, and local network infrastructure to ensure reliable electricity supply.
2. Transmission Charges (TUoS – Transmission Use of System)
- These charges cover the cost of high-voltage electricity transmission from power stations to the local distribution network.
- The System Operator for Northern Ireland (SONI) manages this process and applies the charges.
- Costs include managing the flow of electricity across the grid, maintaining system stability, and ensuring power is transmitted efficiently across long distances.
Types of Energy Contract Pass-Throughs
Hybrid Energy Contracts
Sometimes, your energy contract allows suppliers to pay you extra costs. This is especially true for Transmission (moving electricity) costs and Capacity (ensuring enough electricity is available).
Here’s how it works:
- Fixed-Price Contracts: Suppliers might add these costs when needed, even if your contract has a fixed rate.
- Customer Choice: In some cases, customers can choose to have specific charges (like transmission fees) passed through directly. This avoids the extra fees suppliers might add when bundling these costs into the fixed rate.
Why this helps larger customers:
Find Out Why Hybrid Contracts Work for Larger Customers
Fixed-Rate Energy Pass-Through Charges
Even with a fixed-rate contract, suppliers might add extra costs they face in the wholesale energy market. These costs are usually for Transmission and Capacity rather than electricity or gas. (If you want to learn more about Natural Gas Brokers and Electricity Supply Brokers, click here).
Why does this happen?
Energy markets are unpredictable, and costs can change. Sometimes energy brokers pass these changes on to customers, which has led to complaints because ‘fixed-rate’ contracts aren’t always truly fixed.
What are “Super Fixed” Products?
Some suppliers, like AEP Energy, offer “super fixed” contracts. These guarantee no extra charges for transmission or capacity but usually come with a higher price upfront.
Post-Term Rates
When your fixed-rate contract ends, your supplier may switch you to a default or market-based rate.
- What’s the catch? This new rate is often much higher than your previous fixed rate.
This is a pass-through charge because the supplier takes their wholesale costs, adds a margin, and passes it directly to you.
Avoid the Rate Hike! Speak to our energy expert to lock in a plan that works for you.
How to Avoid Extra Energy Fees for Your Business
Renew Your Energy Contract on Time
Let Your Broker Handle Negotiations
A knowledgeable energy broker can talk to suppliers on your behalf. They’ll negotiate better terms and ensure your contract doesn’t include pass-through fees. (If you want to learn more about Lifecycle Electricity Brokerage Deal Negotiation Contract Signing, click here).
Frequently Asked Questions
They are extra fees added to your energy bill, reflecting costs from the wholesale energy market, like transmission or capacity costs.
Depending on market conditions, weather, or regulation changes, these charges can increase your bill.
Expected charges are planned (e.g., transmission or capacity). Unexpected charges occur due to factors like weather or regulatory changes.
To manage these costs, you can save energy during peak times, audit your bills regularly, and negotiate clear contract terms.
Ensure clarity on pricing, avoid vague terms, and consider hybrid or fixed-rate contracts to minimize unexpected charges.
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