If you have ever chosen a retail energy supplier for your business in a deregulated energy state, then you might have encountered an energy pass-through charge. Now, sometimes these charges can be intentional based on your retail energy contract structure, and other times, can be erroneous and even fraudulent. This article aims to explain pass-through energy costs so you can determine if you would benefit from passing through certain charges, or if you have fallen victim to an energy scam.
What Are Energy Pass-Through Charges
Pass-through energy charges are fees or costs incurred by a retail energy supplier in the wholesale energy market that are passed through to end-user customers in the retail energy market. Sometimes, these fees are expected and other times unexpected based on the retail energy contract terms. Let’s explore the various ways energy suppliers might pass-through energy charges to customers.
Types Of Energy Contract Pass-Throughs
There are several different ways that a pass-through charge might appear on your electricity or natural gas bill from a retail supplier. Let’s explore some of the most common types of energy pass-through line items on an invoice.
Hybrid Energy Contracts
In some cases, supplier contract language allows them to pass on incremental costs in energy to the consumer. Most importantly, suppliers can pass through incremental costs during pre-negotiated fixed-priced electric contracts. Many times, these incremental costs are associated with Transmission and Capacity and not with the actual energy commodity cost. In other cases, customers can elect to have certain portions of their energy rate passed through by the energy supplier. In these instances, the supplier will simply bill the customer its cost for a certain rate component. See this article on Hybrid Block + Index Products.
Many times, larger customers elect to pass through electric transmission and capacity costs from the supplier in an effort to eliminate additional risk margin that the supplier might charge for bundling these costs into a fixed rate. Taking transmission and capacity fees at cost, allows larger users of energy to save substantially.
Fixed-Rate Energy Pass-Through Charges
Sometimes suppliers pass through incremental costs that they incur from the wholesale market to customers, even when they are under pre-negotiated, fixed-priced electric contracts. Many times, these incremental costs are associated with Transmission and Capacity and not with the actual energy commodity cost.
This practice is becoming more commonplace as volatility and unpredictable transmission costs plague the retail energy markets. It has become a point of contention among retail energy customers and regulatory bodies as fixed-rate contracts are not as “fixed” as they seem when additional costs are passed on to customers.
In an effort to differentiate their offerings in the market, some retail electricity providers, such as AEP Energy, offer “super fixed” products that do not allow for additional pass-through charges. These rates are typically higher than other fixed energy contracts that allow for cost adjustments throughout the contract term.
When a fixed-rate contract ends, suppliers may also begin to bill the customer at a market-based rate. This is called the contract rollover rate or a default rate and is many times much higher than a fixed rate. Post-term rates are considered to fall in the pass-through category as energy suppliers will take their wholesale market prices each period, add their margin, and pass along the total amount to the customer.