Probing energy affordability

American consumers make take energy itself for granted, but they know it isn’t free. Energy costs are a part of every family’s household budget. Anyone who drives has to pay for motor fuel (gasoline for most consumers, diesel for a few). Although utility bills can sometimes be included in the rent, the vast majority of households pay at least an electric bill and many might also have additional bills for natural gas, propane or home heating oil.

In economic terms, how well households can afford energy is of course relative to their income. The U.S. Energy Information Administration tracks such data, though with a lag in reporting, revealing that home energy expenditures amounted to 2.7% of household income on average as of 2012. That’s down quite a bit from the high of 4.3% in the early 1980’s when the relative price of energy was much higher than it is today.

But what do people actually feel they can afford? That’s a psychological question rather than one of pure economics, and it’s what we probe in the U-M Energy Survey.

To assess what consumers themselves believe about the affordability of motor fuel as well as home energy, we crafted questions to explore consumers’ thresholds of energy cost pain, so to speak, by asking them how high the cost would have to become before they would find it to be unaffordable. Methodologically, this indirect approach is more reliable than directly asking “how much can you afford to pay for energy?”

Home energy

The first set of questions examined home energy bills, starting with a query to establish each respondent’s baseline, i.e., how much they have recently been paying:

Now thinking about the last time you (or someone else in your household) paid a household energy bill of any kind, how much did that bill cost you? Please do not include your water bill.

If clarification was needed, respondents were told that expenses include whatever they might pay for electricity, natural gas, propane, heating oil or other fuels use at home. If they could not remember a recent energy bill, they were asked to provide their best estimate. We next asked:

What sources or types of energy did that bill cover?

That question was then followed by:

At what dollar amount would that [type of energy stated by respondent] bill become unaffordable to you (and your family)? By unaffordable we mean that you (and your family) would be forced to make significant changes in the way you live your life.

If respondents were unable to provide a dollar value, we asked how much their bill would have to increase in percentage terms to become unaffordable. Respondents who said that their current bill was already unaffordable were asked the dollar amount at which it became unaffordable. Analyzing the responses to these three questions yields the percent increase over recent energy bills that consumers consider unaffordable. Responses averaged to a 140 (±10) percent increase (i.e., a factor of 2.4), but varied by income, home status and region.

Home Energy Affordability by Income Tercile

How much consumers say their home energy bills would have to increase to become unaffordable, by tercile of household income.

Consumers in bottom income tercile believe that home energy would become unaffordable if their bills were to roughly double, reporting an average unaffordability threshold of 102 (±15) percent. The average response of the middle income tercile was 129 (±14) percent. The level was significantly higher for top income tercile consumers, who reported that a 185 (±22) percent increase would be unaffordable. A similarly stepped pattern is found according to home ownership status, with increases of 104 (±14) percent, 130 (±19) and 170 (±22) percent seen as unaffordable by bottom, middle and top terciles, respectively, of property value. On average, renters reported that a home energy bill increase 148 (±22) percent would be unaffordable.

Western consumers view a home energy bill increase of 173 (±25) percent as unaffordable, a level notably higher than the 108 (±22) percent increase found unaffordable by Northeasterners. The South and Midwest fell in between, with bill increases averaging about 135% being seen as unaffordable.