By Calvin Cornish, CEM
November 25, 2019 – If you’ve seen our recent Risk Management video, you know that a Fixed All-In product isn’t your only purchasing option for your electricity.
The chart below shows you the 5 components that make up your electricity supply charges.
Anytime you lock less than all these components, you have chosen a Partial Fixed (also called Pass-Through) product. Any component not included in your fixed rate is “passed through” to you at its actual cost each month.
Clients typically pass through capacity and transmission (yellow and light blue above) because they’re the next largest costs behind energy and are not directly related to your monthly usage.
Why would you choose a Pass-Through Product?
The pros and cons of a partial fixed product mostly center around risk and its effect on price.
Pass-Through Product: PROS
- Reduced risk. Including capacity and transmission as part of your fixed rate converts those flat demand charges ($/day) into usage-based charges ($/kWh). As a result, you could end up paying higher costs for your demand charges.
- Avoid risk premiums. If you fix your cap and trans components, suppliers include a risk premium as part of your rate to protect themselves from underpayment. These risk premiums increase your monthly cost.
- Take advantage of improved efficiency. If you undergo an efficiency project that improves your load profile, you could lower your capacity and transmission charges. You won’t see that decrease if you’ve fixed them as part of your rate.
Pass-Through Product: CONS
- Uncertainty around PLC tags. A large factor in your demand charges is your facility’s usage during the grid’s peak usage periods. There is always a risk that a couple of bad days can result in higher numbers.
- Demand charges could increase. By not including capacity and transmission in your rate, you run the risk of these costs actually increasing if your efficiency declines. The type of facility matters — residential and commercial buildings are less likely to see decreased efficiency than industrial manufacturers.
- Billing complexity. Passing through components adds line items to your bill. A single cost per kWh will always be a cleaner billing option.
Who’s a good fit for a pass-through product?
If you identify with any of the qualifiers below, you could benefit from a pass-through product:
- Clients looking for budget accuracy and have a low risk tolerance
- Anyone with plans to improve efficiency in the next 1-2 years
- Clients with annual usage that varies notably and has a higher chance of decreasing than increasing
- Anyone involved in a buying group
- You want to limit the socialization of demand charges. Otherwise, you could end up paying for the costs of less-efficient buildings.
What should you expect when passing through components?
- The costs for any passed-through components will vary throughout the term of your contract.
- On you electric bill, you’ll see the published tariffed rates for your pass-through pieces.
- You won’t have any hedging premiums on your passed-through components.
Is a partial fixed product right for you?
The list of qualifiers above is by no means exhaustive. The real answer is unique to you based on your risk level, usage profile, and the nature of your business.
Learn about other electricity products:
About the Author
Calvin is a Certified Energy Manager and has served as a Senior Strategic Energy Advisor at Nania Energy since 2010. He specializes in preparing property management boards to make informed decisions on energy efficiency through proper industry education. His clients include apartment complexes, condominium associations, and senior living facilities. In his free time, Calvin enjoys music and coaching youth sports.
Calvin can be reached at (630) 225-4554 or firstname.lastname@example.org.
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