Commercial Electricity Pricing, Explained
Fixed vs. Variable
Electricity Rates.
Fixed, indexed, and pass-through pricing for businesses.
Three ways to decide which costs are certain, which can move, and who carries the risk.
A 5-minute guideThese are not “good, better, best.” Each structure places price risk in a different place.
Start with the Bill
Electricity is not one single cost.
Before comparing contracts, understand what goes into the supply price. The product determines which components are bundled, fixed, or exposed to the market.
Energy
The wholesale commodity—the electricity your organization consumes.
Can be fixed or indexedCapacity
The cost of ensuring enough generation is available during peak demand.
Can be bundled or passed throughTransmission
The cost of moving electricity across the regional power grid.
Can be bundled or passed throughOther Charges
Ancillaries, renewable requirements, supplier margin, and administrative costs.
Contract-specificWhy Capacity and Transmission Are Different
Capacity & Transmission Can Be Billed in Two Ways
Capacity and transmission are annual dollar costs. Once established for the year, they do not increase or decrease based on how many total kWh you use. The contract determines how those fixed annual costs reach the bill.
Annual capacity + transmission costs
Converted into ¢/kWh
Forecast usage is used to spread the annual costs across each expected kWh. Because lower-than-forecast usage could leave the supplier short, the supplier embeds a risk premium—usually increasing the total you pay for capacity and transmission compared with an at-cost pass-through.
Billed separately at cost
The annual costs remain outside the fixed commodity rate and are passed through using the contract's defined billing method.
Lower-than-forecast usage
The supplier collects the embedded charge across fewer kWh and may not recover the full annual cost. This is why the fixed rate includes a supplier risk premium.
Higher-than-forecast usage
You will pay more toward the annual costs than under an at-cost pass-through.
The Three Structures
Same electricity. Different risk.
Product names are shorthand. The contract language, not the label, determines what your organization will actually pay.
More Price Certainty
Fixed Rate
All supply components are bundled into one contracted per-kWh rate.
Capacity and transmission begin as annual dollar obligations—not fixed per-kWh charges. To include them in an all-in rate, the supplier divides the expected annual costs by your forecast usage and adds a risk premium. This protects the supplier if you use fewer kWh than projected and the collected per-kWh charges do not fully cover those annual obligations.
Typically fixed
- Commodity
- Unitized capacity
- Unitized transmission
May remain variable
- Contract exceptions
- Change-in-law provisions
Generally works for
Organizations that prioritize budget predictability and limited monthly price movement.
What to watch
Many fixed-rate contracts contain change-in-law or price-adjustment clauses that can increase the rate if capacity auction prices or a customer's capacity tag change.
Future capacity assumptions
For future years without a final auction price, some suppliers initially price capacity using a lower assumption and reserve the right to adjust it later. A low fixed quote may therefore reflect an underpriced capacity component—not a guaranteed all-in cost for the full term.
Selective Market Exposure
Fixed + Pass-Through
The commodity can be fixed while capacity and transmission remain separate.
Instead of converting annual capacity and transmission obligations into a protected per-kWh rate, the supplier passes those charges through based on the contract's defined method. This reduces the supplier's usage-volume risk and can remove the related risk premium—but the total monthly price becomes less predictable.
Typically fixed
- Commodity
- Supplier margin
May remain variable
- Capacity
- Transmission
- Defined market charges
Generally works for
Larger users that want greater transparency and can actively manage peak-related costs. Meter compares the fixed quote, pass-through costs, and your usage profile before recommending a structure.
What to watch
Pass-through does not automatically mean cheaper, but it often is because capacity and transmission are billed without the supplier's fixed-price risk premium.
More Market Exposure
Index
The commodity price follows a defined wholesale market index.
Your commodity can follow the market hourly or be indexed on a monthly basis, plus a supplier adder and other applicable costs. Historically, index pricing has often produced a lower long-run commodity cost than continuously purchasing fully fixed energy—but it can create significant short-term exposure during volatile periods.
Typically fixed
- Supplier adder
- Contract terms
May remain variable
- Commodity
- Capacity
- Transmission
- Other market costs
Generally works for
Organizations with financial flexibility and informed oversight. Meter evaluates your usage profile and market conditions to recommend when to remain on index and when to hedge.
What to watch
Historical performance does not guarantee future savings. Market averages can also hide costly peak periods, and your load shape matters as much as the published index.
Side-by-Side Comparison
What changes between structures?
These are common product designs, not universal rules. Supplier contracts may define and allocate costs differently.
| Question | Fixed | Fixed + Pass-Through | Index |
|---|---|---|---|
| Commodity price | Typically fixed | Fixed | Market-based |
| Capacity & transmission | Often bundled | Usually variable | Usually variable |
| Budget predictability | Higher | Moderate | Lower |
| Exposure to market increases | Lower | Component-specific | Higher |
| Ability to benefit from falling prices | Limited | Component-specific | Higher |
| Customer oversight required | Lower | Moderate | Higher |
| Supplier risk premium | Generally higher | Potentially lower | Generally lower |
Business Electricity Rate FAQs
Common questions, clearly answered.
Short answers to the questions organizations ask when comparing commercial electricity contracts.
01What is a fixed electricity rate for a business?
A fixed electricity rate bundles supply components into a contracted per-kWh price. The supplier prices expected commodity and market costs—and the risk of those costs changing—into the rate.
02What is an indexed electricity rate?
An indexed electricity rate follows a defined wholesale market price, either hourly or through a monthly index, plus a supplier adder and other applicable charges.
03What are energy pass-through charges?
Pass-through charges keep defined costs—often capacity and transmission—outside the fixed commodity price and bill them separately using the method established in the supply contract.
04What is the difference between an all-in rate and a pass-through rate?
An all-in rate converts expected supply costs into one per-kWh price and includes supplier risk premiums. A pass-through rate fixes selected components while billing designated costs separately at their defined values.
05Is a fixed or variable electricity rate better for a business?
The right structure depends on budget tolerance, load shape, market conditions, and the ability to manage exposure. Meter compares the available contracts and the customer's usage profile before recommending a strategy.
Choosing a Structure
Five questions worth asking.
The right answer depends on your budget, operations, and ability to manage exposure—not simply the lowest quoted rate.
- 01
How much price variability can our annual budget tolerate?
- 02
Which charges are actually fixed under this contract?
- 03
Can we actively manage capacity, transmission, or peak demand?
- 04
Would a short-term price spike create a financial problem?
- 05
Do we have a process for monitoring the market over time?
Important
Read beyond the product name.
The label never tells the whole story. Two “fixed” contracts can contain different exclusions. Two index contracts can use different markets, settlement intervals, and supplier adders. Before selecting any structure, confirm:
- What is fixed—and for how long
- What is passed through
- How variable charges are calculated
- Whether usage tolerances apply
- Whether future hedges can be added
- What happens if accounts or usage change
