Energy Affordability - Consumer Metrics
Energy Affordability - Consumer Metrics
How To Measure Your Personal Energy Affordability
Contents
Introduction
Personal Affordability Metrics
Concluding Remarks
Bitesize Edition
Today’s post will mark the end of my work on energy affordability. Throughout this series, most concepts I’ve explored are useful at an energy production level, or in large-scale projects. However, consumers also need to assess their energy affordability.
In recent years, as inflation has been especially prevalent in the energy sector, we’ve seen household bills rise sharply. I decided that exploring metrics that you could use to assess your personal energy affordability would be useful. Hence, today’s post will explore 14 metrics and ratios related to household and consumer energy affordability. I hope you can find some use for them!
At the bottom of this piece, as my work on energy affordability comes to an end, I’ll be making some changes to these posts released on a Thursday as part of my work on self-sufficiency. The change isn’t unprompted and relates to a change in my personal life. For more information on this, check out the concluding remarks section. I’ll also post this in my Substack chat.
For now, let’s explore some personal energy affordability metrics!
Introduction
Over the last few years, we’ve seen inflation rear its ugly head, especially when it comes to energy prices. The dislocation between Russia and Europe saw natural gas prices rise sharply, especially in the EU, and oil was elevated during the same period.
It’s useful to explore energy sources on a large-project level to have a general understanding of energy production and energy supply chains. However, at the end of the day, it’s rising bills that are how these issues are reflected in our everyday lives that cause us problems. And so, today I’m going to explore personal affordability metrics. How can we analyse our own energy bills, and are there ways that we can reduce our cost of energy through our energy bills?
Personal Affordability Metrics
Energy Burden or Income to Energy Ratio:
This metric quantifies how much household income is spent on energy bills. A high energy burden would indicate a significant portion of total income is being spent on energy bills. This is often considered greater than 6% of total income. More than 10% of income is classed as a severe energy burden. Energy costs include gas, electricity, heating, cooling, and any other energy-linked expenses.
In households with high or severe energy burdens, it highlights the difficult choice some have to make between energy and other necessities. When used effectively, this metric can highlight inequality and allow for subsidies, rebates, or efficiency upgrades to occur where necessary.
Energy Cost Per Unit:
This is the price a household pays for each unit of energy, typically measured in cost per kilowatt hour for electricity, or per cubic metre for gas, for example. This can be useful in comparison to other energy providers, regions, times of day, and whether fixed or variable tariffs are more affordable.
Debt-To-Income Ratio:
This metric compares a household’s monthly debt payments to total monthly income. It assesses a household’s financial health and creditworthiness. A high ratio indicates less room for new debt and has the potential for a household to struggle to repay debt. This can be applied individually to energy bills, or as a supplement to a financial budget of all our finances.
Liquid Asset To Energy Bills Ratio:
Liquid refers to cash or assets that are easily convertible into other forms. It hence assesses the ability of a household to cover energy bills using cash and easily accessible forms of assets. It’s particularly useful in a scenario where income loss or a large rise in expenses could occur, leading to an emergency fund being used to pay energy bills.
A higher ratio indicates greater affordability for a household and would be seen in a ratio greater than 1. A ratio of less than 1 indicates a household doesn't have enough liquid assets to cover one year of energy costs.
Income-To-Electricity Ratio:
This metric refers to the household income spent on electricity specifically. This can allow a comparison between household income spent on electricity and household income spent on total energy. As the world moves to one of electrification, I’d expect this ratio to rise for households if income remains unchanged. This ratio hence should be compared with the energy ratio. A rising ratio could also indicate that electricity-saving measures could be implemented.
Electricity Price:
This refers to the raw price a consumer pays for electricity. This can differ based on a fixed rate, time-of-use rate, or variable tariffs. The source of electricity, geography, and seasonality can also affect electricity prices. Many regions and countries around the world have different structures to charge for electricity.
Energy Poverty Rate:
The energy poverty rate assesses the proportion of households in a region or country that can’t afford to meet their energy needs. In connection with the energy burden from above, any household that is paying a large percentage of their household income towards energy bills could be classed as in energy poverty. This rate can be impacted by income, energy prices, housing energy efficiency, and availability of energy sources. If the energy transition is botched, this figure has the potential to rise in usage. It can also be utilised in underdeveloped countries to indicate the need for regions where extra development could be prudent.
Subsidy Impact:
This can evaluate the impact subsidies have on the prices consumers pay for a good or service. In this case, that will be electricity or energy. This can be interpreted as a percentage change in price, or through a change in demand.
Seasonal Energy Cost Index:
This ratio compares the energy cost in peak seasons versus off-peak seasons. This can be used as a seasonal factor multiplier in calculating energy bill spikes during peak periods as seen in the metric below.
Seasonal Energy Bill Spike:
During peak seasons, prices can rise sharply, be it heating during winter or cooling during summer. The rise in prices is often influenced by rising consumption or variable rates. Baseline energy consumption refers to the consumption during off-peak months. A seasonal factor is a multiplier that accounts for the changes in consumption during high-peak periods. Calculating this will allow consumers to analyse the additional costs that will be incurred during peak energy demand times. From this, affordability metrics can analyse if these changes in prices are affordable, or if energy-saving strategies or alternative sources could be pursued.
Energy Use By Dependency Ratio:
This ratio can be used as a deeper exploration of energy usage in a household. While not particularly analysing affordability, it can be useful to explore the consumption patterns of those who are dependents in your household. For example, children typically have lower individual use but do drive up household bills. The energy consumption for the elderly is dependent on health and living situation. Typically, the working-age population drive the most energy consumption in households.
For example, let’s say a household has 3 children and 2 adults. This would lead to a dependency ratio of 150. (3/2 * 100%)
If total household energy consumption is $2400 per annum, then the energy use per dependency ratio would be this divided by the dependency ratio of 150. This leads to $16 per dependency unit of energy.
The figure can aid policymakers in exploring potential programs to improve energy efficiency and affordability, especially in households with high dependency ratios.
Regional Energy Cost Differential:
The metric here taps into differences in energy costs in different regions. This can be determined by energy sources, infrastructure, government policy, supply-demand relationships, and market competition and structure.
Especially in the United States, as states approach their clean energy transitions differently, a metric such as this could be useful. As I have discussed often, the environment should be considered in energy policy. If you’re in a windy region, use wind. If you’re sunny, use solar. If you have access to uranium, build nuclear. It shouldn’t be an isolated determinant of energy policy, but it should aid decision-making.
Outdated infrastructure, government regulation, market competition, and demand patterns also influence regional energy costs. If one region is higher than another, it should be aspects such as this that are explored.
Rent-to-Own Energy Cost Ratio:
This is a metric often unseen, but it compares the costs of renting energy systems versus owning them. It can be assessed if it is more viable to rent or own energy solutions yourself based on your individual usage, costs, and savings.
When renting, you have the monthly costs, as well as installation, maintenance, and other fees.
When owning, you have the initial purchasing cost, and also installation, maintenance, and other fees.
Hence, exploring this ratio will generally compare the monthly rental fee and the expected number of months rented versus the upfront cost of ownership. A ratio of less than 1 indicates renting is cheaper, whereas a ratio greater than 1 means owning is more cost-effective.
Finally, it can also offer more flexibility in renting if it is more cost-effective. This flexibility could provide an opportunity to upgrade or change systems.
Energy Source Affordability Ratio:
This metric can compare the costs associated with different energy sources. A ratio of less than 1 indicates source A being more affordable. A ratio of greater than 1 indicates source A is more expensive than source B.
When exploring a certain region, the metric can help consumers in choosing the most cost-effective energy source based on local pricing and usage. What the metric doesn’t consider is efficiency, seasonal variations, the impact of government incentives such as subsidies, and any energy system ownership or renting costs. The ratio can be useful, but there are more concepts under the surface to analyse when it comes to the costs of energy sources.
Concluding Remarks
In this series, I’ve discussed that the cost of labour, capital, government, and energy are the four potential costs in energy projects.
I’ll now move on to exploring energy through a different scope, having covered efficiency and affordability.
I also have some big news about this series going forward. I’ll soon be leaving the UK and travelling for multiple months. Hence, I will be making some small changes to Geopolitics Explained as a result. The Geopolitics Review released every Monday will be 100%-guaranteed every week, as it has been for almost two and a half years. It will remain free to all, forever.
As for the self-sufficiency series I release on a Thursday, I intend to continue to release every week. But as I move around, releasing this post on top of the weekly review will be easier in some weeks and more difficult in others.
As I also have other series I enjoy writing, my aim will be to release one free post and one paid post every week. This paid post will cycle between my self-sufficiency series, the Global Questions Series exploring the biggest issues in geopolitics today, work on my Geopolitics Database, and podcast episodes.
Like all change, it could take some time to get settled into a fixed routine, but Monday’s Geopolitics Review will remain free every week. The major change will be these self-sufficiency posts pivoting into paid posts. Any feedback as I seek to continue to grow Geopolitics Explained would, of course, be appreciated!
Thanks for reading! I’d greatly appreciate it if you were to like or share this post with others! If you want more then subscribe on Substack for these posts directly to your email inbox. I research history, geopolitics, and financial markets to understand the world and the people around us. If any of my work helps you be more prepared and ease your mind, that’s great. If you like what you read please share with others.
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Sources:
chatgpt.com
This is a great piece Dylan! Personally, this is another argument I can use as to why renting is more affordable than owning. By the way, Bon Voyage(s). Will you be sharing where you'll be going?