Why do we pay standing charges for gas and electricity?

Can utilities provide a clear and sensible explanation for the rip-off known as fixed costs?

Having just received my combined gas and electricity bill, I find fixed costs to be just over £76 for the quarter.

This equates to over £300 a year added to the bills of struggling bill payers. No matter what I do to save money by reducing my energy use, these daily expenses will eat up everything I’ve saved.

While I understand that providers need to maintain networks and infrastructure, why are there such high costs regardless of your circumstances or usage?

The wholesale price of gas and therefore of electricity is going down.

Why can’t these unfair fees be based on a percentage of a customer’s actual usage?

Better still, reduce dividends paid to shareholders and pass the savings on to customers.

Helen Kirrane from This Is Money replies: At a time when many people are trying to reduce their energy consumption to keep skyrocketing energy bills down, it can be frustrating that they still have to pay a flat rate.

Fixed costs are part of an energy bill.

Not only do fixed charges have to be paid whether or not you use energy, they have also risen to 50 pence per day for electricity and 28 pence per day for gas.

So why do these fixed costs exist and where does all that money go? We put this to some experts.

Natalie Mathie, energy expert at Uswitch, said: ‘Ongoing charges were introduced to ensure that all energy tariffs follow the same pricing structure – making it easier for consumers to compare deals across the market.

‘A standardized fixed charge means that all households contribute equally to the costs of supplying gas and electricity to their home, maintaining the network and other associated costs.’

But the rising costs of fixed costs have baffled many households. It is possible to save money on the unit rate – the energy we use – but not on the daily fixed costs.

But there’s a good reason for fixed costs, according to Alex Hasty, director of comparison website Compare the Market.

Hasty said, “The cost affects the complexity of the infrastructure needed to power your area and the needs of the local population.”

Laura Woolsey, principal analyst at Cornwall Insight, said fixed costs are an unavoidable cost associated with connecting to the grid.

“Networks should be maintained independent of usage, metering and maintenance should also be independent of usage,” she said.

“The same also applies to things like last resort supplier costs, as the total cost to be recovered cannot be reduced by reducing usage,” she continued.

In other words, that means that fixed costs are permanent.

Otherwise, energy suppliers run the risk of not being able to set aside money for renovation works, for example if national energy consumption were to fall.

How Much Do Fixed Costs Add to Bills?

The daily rate depends on your energy supplier and where you live. Over the course of a year, this can add up to a considerable amount.

Regulator Ofgem sets an energy price cap. This limits the unit rate and standing fee that a supplier can charge if you have a standard rate, including standard variable rates, or if you have a prepayment meter.

Between April and June 2023, average fixed costs for standard rate customers were capped at 50.4 pence per day for electricity and 27.7 pence per day for gas.

This works out to about £285 a year for average usage – 10 per cent of a typical utility bill.

Why have fixed costs increased?

Woolsey explained: ‘Fixed costs have increased in recent years for several reasons.’

Part of this has to do with the energy crisis, particularly with regard to the provider of last resort payments.

“As we have seen many supplier failures in recent years, last resort payments to suppliers have been remarkably high in the years 2022-23 and 2023-24,” she adds.

Where does the money you pay for fixed costs go?

Alex Hasty compares fixed costs to a line rental, but for your energy use instead of your phone.

The standing charge covers various costs for an energy company, bundled in one package.

Think of administration costs, meter readings, connecting homes to the energy network and maintenance.

Government schemes to reduce carbon emissions and fuel poverty, and the costs of energy suppliers going out of business, are also covered by fixed fees, says Mathie.

They are also used to recover pass-through costs, such as last resort supplier payments and bad debt charges, according to Woolsey.

Residual network costs are also included, which recoup costs such as installing pylons and cables.