Energy Affordability - Consumer Metrics

How To Measure Your Personal Energy Affordability

Contents

1. Introduction

2. Personal Affordability Metrics

3. Concluding Remarks

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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!

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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?

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Personal Affordability Metrics

• Energy Burden or Income to Energy Ratio:

\(= \frac{\text{Annual Household Energy Costs}}{\text{Household Income}} * 100\)

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.

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• Energy Cost Per Unit:

\(= \frac{\text{Total Energy Bill}}{\text{Total Energy Consumption}}\)

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.

Photo by JOHN TOWNER on Unsplash

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• Debt-To-Income Ratio:

\(= \frac{\text{Total Monthly Debt Payments}}{\text{Gross Monthly Income}} * 100\)

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.

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• Liquid Asset To Energy Bills Ratio:

\(= \frac{\text{Total Liquid Assets}}{\text{Annual Energy Bills}}\)

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.

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• Income-To-Electricity Ratio:

\(= \frac{\text{Annual Electricity Bills}}{\text{Household Income}} * 100\)

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.

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• Electricity Price: