Fixed cost

A fixed cost remains basically constant regardless of the level of output or operation in a company over a short period of time (one to a few years). Most energy companies incur fixed costs regardless of how many services they provide. For example, a utility has fixed costs that do not increase or decrease as commodity sales go up or down. And a power plant has certain fixed overhead and maintenance costs that are incurred whether or not the power plant generates any electricity. 

Typical fixed costs for a utility include depreciation expense, interest payments, property taxes and franchise fees, administrative costs including staff salaries, and most operations and maintenance costs. These expenditures are required even when facilities are not in use or are not used at full capacity. For most utilities, fixed costs make up most of the costs incurred to provide service to customers. This can cause revenue recovery issues if sales fall since costs remain the same while revenues go down. Some utilities are protected from this risk by a ratemaking methodology called decoupling, but others are not. As customers get more options for energy services including rooftop solar, batteries, and reducing gas use through electrification, recovery of fixed costs may become an issue for some utilities.