Pass-Through vs All-Inclusive Contracts: What Every SME Needs to Understand

The Difference Between Pass-Through and All-Inclusive Energy Contracts Can Be Worth Thousands of Pounds Per Year. Most SMEs Don’t Know Which One They’re On.

There are two fundamentally different ways that non-commodity costs — network charges, environmental levies, and taxes — can be handled in a business energy contract. In an all-inclusive (sometimes called “fully fixed” or “bundled”) contract, every cost component is rolled into a single unit rate and the supplier carries all price change risk for the contract duration. In a pass-through contract, the wholesale energy cost is fixed but every other charge is billed at actual rates as they change — passed directly to the customer as they move.

Most business owners who have a fixed-price contract assume they’re on an all-inclusive deal. Many are not. The contract they signed may have a fixed unit rate headline while containing pass-through provisions for specific cost categories that can — and do — change during the contract term. Understanding which you’re on, and what the implications are, is essential before you sign your next renewal.

All-Inclusive (Bundled) Contracts: What’s Fixed and What’s Not

A genuinely all-inclusive fixed contract locks in a single unit rate that incorporates:

• Wholesale energy cost (the largest component)
• Network charges: TNUoS (transmission) and DUoS (distribution)
• Environmental levies: Renewables Obligation, Contracts for Difference, Feed-in Tariff levy, Capacity Market charge
• Supplier margin and metering costs

When you sign an all-inclusive deal, the supplier takes on the risk that any of these components changes during your contract term. If the Capacity Market levy increases in the next regulatory period, the supplier absorbs it. If DUoS rates are revised upward by your regional Distribution Network Operator, the supplier absorbs it. Your unit rate does not change.

This certainty has a cost. The supplier embeds a risk premium — the expected cost of potential charge increases over the contract term — into the unit rate you’re offered. For 12-month contracts, this risk premium is modest. For 24–36 month contracts, it is larger, because the supplier is carrying more exposure over a longer period.

The premium is worth paying when charge volatility is likely — which, in the current environment of rising infrastructure investment costs and ongoing energy system reform, is most of the time for most SMEs.

Pass-Through Contracts: What “Fixed” Actually Means

A pass-through contract — also called a third-party charge (TPC) pass-through — fixes only the wholesale energy cost and supplier margin. All other charges are passed through at actual rates. Your contract will describe this in terms such as “the unit rate is fixed for the contract term excluding third-party charges” or similar language.

In practice, the charges that “pass through” on most such contracts include:

• TNUoS: Transmission network charges, including Triad-related charges, which are re-set annually by National Grid/NESO and can move meaningfully year to year.
• DUoS: Distribution charges, re-set annually by each regional DNO and subject to Ofgem periodic review outcomes.
• Capacity Market Supplier Charge: Varies with each auction outcome and settlement cycle.
• Renewables Obligation and CfD levy: Both are re-set annually and have historically trended upward as renewable capacity has expanded.
• BSUoS (Balancing and Settlement Use of System): The charge for balancing the system in real time. Highly volatile — BSUoS charges can swing significantly based on system events, renewable curtailment costs, and interconnector flows.

On a pass-through contract, every one of these charges is variable. Your supplier can tell you what these charges are currently — they can be found on your current bill if you know where to look — but they cannot tell you what they’ll be in 18 months. They will be whatever the relevant regulatory or market outcome produces.

The Financial Implications of Getting This Wrong

The difference between all-inclusive and pass-through pricing can translate to meaningful real-world cost divergence over a contract term. Here’s a specific example:

A business on a 24-month pass-through contract, consuming 500,000 kWh per year of electricity, signs with a fixed wholesale unit rate of 12p/kWh. At the time of signing, total non-commodity charges add 8p/kWh — so total all-in cost is approximately 20p/kWh.

During the contract term, a combination of TNUoS re-set, Capacity Market charge increase, and DUoS uplift following a periodic review adds 1.5p/kWh to the non-commodity charge stack. The business’s effective all-in rate moves from 20p to 21.5p/kWh — a 7.5% increase in total bill, despite the “fixed” contract.

On an all-inclusive contract at the same starting rate, the business would have paid the risk premium embedded in the initial rate (perhaps 0.3–0.5p/kWh higher than the pass-through headline) but would have been insulated from the 1.5p uplift. The all-inclusive contract would have been more expensive for the first year and cheaper in the second — the usual dynamic when charges rise during the term.

For a business consuming 500,000 kWh per year, a 1.5p/kWh non-commodity uplift represents £7,500 per year in additional cost. Over the second year of a 24-month pass-through contract, that’s real money that wouldn’t have been paid on an all-inclusive deal.

BSUoS: The Pass-Through Charge That Catches Businesses Off Guard

Balancing and Settlement Use of System (BSUoS) charges deserve specific attention because they are among the most volatile and least understood pass-through costs. BSUoS is the charge that recovers the cost of balancing the electricity system in real time — paying fast-response generators to provide additional power, curtailing renewable generation when there’s too much, and managing interconnector flows.

As the UK grid has become more complex — more variable renewables requiring more balancing actions, more storage and demand-side response interacting with the system — BSUoS costs have grown and become more volatile. In some years, BSUoS has moved by more than 50% relative to the previous year.

On a pass-through contract, this cost hits your bill. On an all-inclusive contract, the supplier has embedded an estimate of BSUoS into your rate and carries the risk of the actual outcome.

Which Structure Suits Which Business

The choice between all-inclusive and pass-through is not absolute — it depends on contract length, current non-commodity charge trajectory, and the business’s ability to manage cost variance.

All-inclusive is generally preferable when:

• The contract term is 24 months or longer — more opportunity for charges to move materially
• The business requires strict budget certainty — hospitality, retail, any business with thin and fixed margin structures
• Non-commodity charges are in a period of anticipated increase (which is the current environment)
• The business doesn’t have the internal capability to monitor and forecast pass-through charge movements

Pass-through may be worth considering when:

• Non-commodity charges are expected to fall — which is relatively unusual in the current environment
• The business has active energy management capability and can monitor and forecast pass-through costs
• The all-inclusive risk premium is significantly elevated (indicating suppliers expect charges to rise substantially) and the business is willing to take the risk that they don’t

How to Check Which Contract You’re On

Your contract document will specify how non-commodity charges are handled. Look for phrases including:

• “Third-party charges are passed through at actual cost” — pass-through
• “Unit rate fixed for the duration of the contract term” (without qualification) — all-inclusive
• “Unit rate fixed excluding third-party charges” — pass-through
• “All costs are included in the stated unit rate” — all-inclusive

If you can’t locate your contract document, ask your supplier or broker to confirm in writing how third-party charges are handled. If they can’t answer the question clearly, that in itself tells you something about the quality of the contract management you’ve been receiving.

Telnergy’s Approach to Contract Structure

We specify contract structure explicitly in every recommendation we make — it’s not a footnote. For most of our SME clients in the current environment, we favour all-inclusive contracts on the basis that non-commodity charge inflation is a more likely outcome than non-commodity charge reduction over a 24-month term. Where pass-through is the better option for a specific client, we explain why in concrete terms.

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Telnergy Limited • Independent Energy Consultants since 2002 • Ofgem TPI Registered • Christchurch, Dorset