Impact of the Energy Crisis on Private Households

Private households have been significantly affected by the rise in energy prices since the pandemic, according to a study by the Chair of Energy System Economics at RWTH. The chair set itself the task of examining and measuring the energy cost crisis, particularly following the Russian invasion of Ukraine.

The war dealt a financial blow to private households (see image 1). Before the pandemic, households spent an average of around 7 percent of their annual disposable income on electricity, natural gas, heating oil, gasoline, and diesel. This rose to an average of 9.8 percent by September 2022.

The Chair of Energy System Economics investigated these impacts in a recent study^[1].

Energy Costs for Private Households Are 40 Percent Higher

When prices change, private households adjust their consumer behavior in line with their relative purchasing power. With rising energy prices, households therefore reduce their energy consumption. In economics, such consumer changes are measured in relation to the change in prices as price elasticity of demand. In the study, the price elasticity for the different energy sources was investigated and modeled for households depending on their respective incomes. Based on these models, the effects of the energy price crisis were then simulated and evaluated for around 60,000 representative households. ^{[2, 3]}

For example, an average household of four using natural gas for heating now spends an additional 3.7 percent of its disposable income on energy bills. This corresponds to an annual additional expenditure of 2,828 euros. Increased natural gas prices account for 63.3 percent or 1,790 euros of this, followed proportionately by gasoline and diesel with a total of 26.5 percent or 748 euros and finally, electricity with 10.3 percent or 290 euros.

Low-Income Households Hit Hardest

The study also illustrates that households are affected by surging energy prices to very different degrees. Households were divided into ten income deciles, with each decile representing ten percent of all households in Germany. The results show that low-income households are most affected by increased energy prices relative to their respective incomes. Over the period in question, the low-income households in the lowest decile had to find an average of an additional 4.3 percent of their income, 560 euros, to pay their energy bills. For the high-income households in the top decile, the figure is 1.5 percent or 1,473 euros (see Image 2). Thus, between households in these income groups, there is a factor of 2.6 for absolute additional energy expenditures. However, between household disposable incomes, the factor is 8.2. These differences are ultimately also reflected in a slight increase of 0.45 percent in the Gini coefficient, which measures income inequality in our society.

High Prices Help Guarantee the Energy Supply

Increasing energy prices are placing a significant burden on private households, especially those already on the poverty line. However, the study also clearly shows that high energy prices lead to a measurable reduction in household energy consumption (see Image 3). At price levels like those in September 2022, households reduce their total annual natural gas consumption by 67.4 terawatt hours, their heating oil consumption by 1.9 billion liters, their fuel consumption by 2.3 billion liters (gasoline and diesel combined), and their electricity consumption by 1.5 terawatt hours. Given the limited supply caused by stepping away from Russian energy, such price-induced energy savings also help to mitigate supply bottlenecks to a considerable extent. In comparison: Natural gas imports from Russia amounted to around 500 terawatt hours in 2020.

Policy Measures Must Balance Support and Supply Guarantee

Policymakers are trying to lessen the financial burden on private households and social hardships by putting various measures in place. Yet they also need to boost the guaranteed supply by reducing overall energy consumption.

When discussing energy policy measures, therefore, social relief should be taken into account in addition to blanket support payments. For example, results from the study indicate that financial support for gasoline and diesel tends to lessen the burden on high-income households. Lower-income households, however, would be more likely to benefit from natural gas support packages.

Nonetheless, when discussing suitable measures, their effects on the energy demand should also be considered. Particularly in the case of costs or tax support packages such as price caps or tax rebates, we need to bear in mind that these will lead to a certain rebound in energy consumption and thus also to an increase in energy shortages.

– Authors: Aaron Praktiknjo, Jan Priesmann