Nathan Smith, VP SME Business, SEFE Energy UK
When planning a summer holiday abroad, the temptation is sometimes to opt for the cheapest flights. However, once all the hidden extras are counted, from choosing a seat to adding hold luggage, it often becomes apparent the initial price was just too good to be true. A similar scenario is being faced by organisations with fixed price energy contracts, which may look competitively priced, but can be designed in a way that means overall costs are far from fixed.
Procurement teams and energy managers are increasingly opting for fixed price contracts to safeguard against uncertainty in a volatile market, but if misunderstood, this approach can lead to unexpected costs. That is why it is essential to know how to interrogate contracts and ask for clarity from suppliers if terms remain unclear, alongside understanding how non-commodity and potential pass-through costs work.
When is a contract truly fixed?
It is often assumed fixed energy contracts mean the same thing across suppliers, but in reality, they vary greatly, with important implications for risk exposure. To take non-commodity charges as an example, there are regulatory levies, which some suppliers may not include in the upfront fee, but instead pass through later. One timely non-commodity charge is Nuclear RAB, which came into force in December 2025 to help fund the development of nuclear power stations such as Sizewell C. Regulatory levies such as this are important to be aware of, and are common across fixed price contracts because they are introduced at short notice, meaning they are more likely to be passed through by suppliers trying to control abrupt spikes in costs.
Those levies differ from Transmission Network Use of System (TNUoS) charges, which have been in place for decades, and are revised annually to cover the cost of installing and maintaining the transmission system. The National Energy System Operator (NESO) has estimated that around £10 billion a year in investment is needed for electricity transmission between 2025 and 2030 to meet the UK Clean Power 2030 goals. As a result, TNUoS charges are expected to rise and for many organisations that will mean greater pass-through costs that they may not be expecting if they have not understood how this is being accounted for in their contract.
Another less-understood charge is unidentified gas (UIG), which encompasses losses of gas across the system, whether stolen or consumed through unregistered meters. Suppliers must account for these losses and may pass through the costs to their customers on fixed price contracts. UIG can often go unnoticed in a stable market, but where wholesale natural gas prices rise, organisations could be exposed to unforeseen costs.
These non-commodity costs should not necessarily deter organisations from selecting a particular contract because the certainty of energy costs or another benefit may outweigh the risks. What matters most is making an informed decision, where organisations are clear about the level of risk they are taking on, so they avoid being blindsided by unforeseen costs.
Devil in the detail
It is important that organisations scrutinise different options available to them before signing up to a contract. To do that, they should check the “charges” section within the terms and conditions; suppliers have a legal obligation to outline which costs are fixed or pass-through for the duration of a contract.
Terms and conditions are available to potential buyers before price quotes are provided, so supplier options can be properly reviewed and potentially dismissed from the process at an early stage. This helps organisations avoid the trap of going too far down the path with a batch of supplier options that have attractive headline rates but include unexpected costs. Even when these risks are identified before the contract is agreed, there can be time pressures close to the point of signature that hamper clear decision-making. Therefore, it is important to rule out unsuitable options at an early stage.
Where contract terminology is unclear, organisations have the option to ask their broker or supplier to explain the implications of certain charges and clarify whether costs are fixed or not. Suppliers have an obligation to provide transparent pricing and offer dedicated support to make sure their customers can always make an informed decision on their contracts, so procurement teams and energy managers shouldn’t shy away from asking any questions they have.
New contract strategy
Due to the complexities and potentially unexpected costs involved, contract assessment is now a more strategic decision than before, with the risk of incurring serious costs. Yet there is also an opportunity to successfully mitigate risks. Despite new due diligence challenges, the organisations that know where to look and feel empowered to ask questions can reduce uncertainty in a volatile market. Much like a holiday booking, there is peace of mind in knowing your costs are truly fixed.
This article appeared in the July/August 2026 issue of Energy Manager magazine. Subscribe here.
