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There are three main types of contract pricing structures within both the electricity and gas markets:

• pass through; and

• indexed arrangements.

The broad principles of each structure are summarised below and are followed by more detailed consideration of cost elements as they typically appear on bills. Table 4:2 below presents a summary of key points.

4.2.1. All Inclusive

An all-inclusive pricing structure incorporates rates covering all supply chain cost elements: the wholesale cost of the energy, published delivery costs

(distribution and transmission use of system charges and losses for electricity customers, transportation charges for gas customers) and metering and data collection charges. Usually, costs for the Renewables Obligation are included within the electricity supply rates, whilst the Climate Change Levy and Value Added Tax are normally exclusive in both electricity and gas. In this type of contract pricing structure, the supplier makes an assessment of the expected costs for delivery, and the customer pays upfront agreed unit rates (per kWh consumption) for the contract duration, probably in a traditional tariff type structure. The number of unit rates can range up to six but typically either one or two is most common.

In gas, such pricing arrangements will include wholesale and transportation costs, with taxes again separately itemised. It is more common for prices to be presented on an all-inclusive price basis in gas, but this does not necessarily mean that changes to Transco charges will be passed through to the customer. Such arrangements are becoming more prevalent in gas.

All-inclusive pricing arrangements are most common at the lower

consumption levels of the power market, both non-half hourly and small and medium half hourly metered sites. Additionally, for larger electricity and gas customers with many small sites, the complexity of the offer analysis and

contract administration tends to encourage the use of simpler pricing structures of this kind. Furthermore, it is also worth noting that the presentation of the pricing structure may not preclude the pass through of cost changes (in both wholesale and published charges) that occur during the life of a supply contract. This is a matter for commercial negotiation.

4.2.2. Pass Through

Pass through pricing arrangements are common in both electricity and gas supply contracts for larger users and provide for the separation of billing of published charges (covering distribution, transmission and levies) from the non- published commercially negotiable wholesale price for serving the customer.

There are a number of variations as to what is, and what is not, included within the energy price of a pass through contract, for example, in relation to electricity BSUoS and transmission charges. Published elements, billed at pass through, will typically include transmission network use of system charges, distribution use of system charges, distribution losses, settlement charges, taxes and levies. A common pass through contract structure in the electricity market is ‘Energy at GSP’ (Grid Supply Point).

A GSP energy price includes the wholesale cost of power, BSUoS and the cost of transmission losses, whilst all other cost elements need to be added on to reach the delivered price. Some pass through contracts may also show separately the supplier’s administration/management fee. In gas, transportation and metering charges are billed at pass through for the duration of the contract. In addition, the supplier may separately identify its administration / management costs, as well as – although much less commonly – its charges for profile variation (referred to as swing). Both these latter elements are usually fixed price cost elements agreed during the contract negotiation.

Pass through pricing arrangements tend to be more prevalent in the larger half hourly volume electricity market.

4.2.3. Indexed Arrangements

Indexed pricing structures are now increasingly becoming popular in the larger volume sectors of both the gas and electricity markets. Much of this popularity appears to be forced, as customers seek relief from current high wholesale prices. This type of pricing arrangement also separates the cost of the commodity from the other ‘fixed’ price components, like the pass through contract. However, the commodity cost element will move according to a formula related to agreed measures of wholesale market prices. Examples of indices used are baseload month and year-ahead indicators published by price reporters and brokers. Such mechanisms allow the customer to make ongoing purchasing decisions throughout the duration of the contract.

The applicable published charges (such as delivery, transportation and metering) are billed at pass through, and other costs, for example the supplier’s administration fee and any balancing and risk management charges, are agreed in advance. These arrangements are becoming predominant for larger gas users. In the electricity market, this is an area that is now developing at a fast pace, especially in response to the sharp increases in wholesale power prices. Further detail on the workings of such contract types is provided in the Sections below.

Table 4:2: Summary of Electricity and Gas Contracts to Business Customers

Electricity Gas

Non-half

Hour Half Hourly Small Large

Supplier

Pricing Profile based, often against standard matrices

Site specific Site specific / Group pricing for multi site groups

Site specific

Pricing

structure All inclusive, fixed price Fixed cost of energy, pass through of individual cost components

All inclusive,

fixed price Pass through, indexed arrangements Contract

Duration 24 months plus 12 months 12 months plus 12 months

Contract

structure Standing charge Unit rate Standing charge Capacity charges 2 plus unit rates Standing charge Unit rate Standing charge Unit rate Current

developments Focus on multi-site service issues by some: supplier switching process, multi billing etc.

For very large customers: flexible pricing products Energy management related, longer-term contracts Focus on multi-site service issues by some: supplier switching process, multi billing etc. Energy management related, longer-term contracts