Introducing the Energy Affordability Index

The University of Michigan Energy Survey has developed a new way to measure how affordable Americans think energy is. Based on responses to questions that elicit consumers’ individual feelings about what they pay for home energy and gasoline, we compute an index that reflects how high an energy expense would have to rise before their household would find it unaffordable. In this context, “unaffordable” doesn’t mean that the consumer could not afford to buy gasoline at all, for example. Rather, it means that the price has gotten so high that the consumer believes they would have to make changes in their lives (drive less, for example) because of the cost.

We modeled the energy affordability index on the widely reported index of consumer sentiment generated by the University of Michigan Surveys of Consumers (“SCA”). The energy survey is conducted as a quarterly rider on that long-running monthly survey. Adopting the methods used by the SCA, the energy survey probes consumers’ personal cost thresholds by asking respondents how their high energy expenses would have to go to become difficult to bear. This psychological rather than economic approach provides a clear picture of what consumers really feel about the issue at any given point in time.

An affordability index of zero indicates that consumers already feel that the given energy expense is unaffordable. An index value of 100 indicates that consumers believe the cost of energy would have to double before they would view it as unaffordable.

This initial report on the energy affordability indices is based on two years of quarterly survey data, comprised of eight samples starting in October 2013 and gathered every three months through July 2015.

Over this two-year period, the average affordability index for home energy was 125, indicating the Americans on average believed they they could afford more than a doubling in their home energy costs. Gasoline, however, is viewed as significantly less affordable than home energy. The average affordability index for gasoline over the past two years was 80, meaning consumers on average would find motor fuel to be unaffordable at a price notably short of twice what they’ve been paying.

The home energy affordability index was fairly stable over this period. That’s in contrast to the situation for gasoline, where the affordability index increased as the price fell in the second half of 2014 and early 2015 before rising again this past summer.

For more about these new results on on energy affordability, download the report:
How Much of an Increase in Home Energy and Gasoline Costs Do People Think They Can Afford?

For further details on the method, see Energy Affordability Indices: An Overview.