A Guide to Improving Electricity Affordability

An array of programs and policies can help households more easily afford their electric bills.

Concerns about the affordability of electricity bills have become especially acute in recent years, and these concerns appear to be growing. Rising inflation across the economy strains household budgets, which can be particularly detrimental for electricity prices, given that electricity is essential for heating, cooling, lighting, cooking, and other basic household needs.

Policymakers may wonder what policy tools are available to address electricity affordability. This blog post aims to answer that question and provide some examples and further insights. A wide range of policymakers and other stakeholders can play a role in these efforts, including utilities, public utility commissioners, legislators, governors, local government officials, and nonprofits. Each of these parties could participate in most of the actions described below, which include passing legislation, designing a program, and helping programs reach low-income households.

Affordability Programs Can Help Reduce Household Energy Costs

Affordability programs and policies work best in concert with each other, given that each intervention may be insufficient on its own to meet a household’s needs or prevent a household from falling into arrears (i.e., falling behind on their electricity bill).

Consider an example household that uses electricity for most of its energy needs, including space heating and cooling, but has an inefficient system of heating, cooling, and insulation. The average monthly usage of electricity for such a customer may be about 1,500 kilowatt-hours per month and vary throughout the year. In a month that is especially hot or cold, usage could rise to 2,500 kilowatt-hours, a typical amount across much of the country for a single-family, all-electric home that is not energy efficient.

Let’s assume that an electric utility charges a rate of 15 cents per kilowatt-hour of electricity consumed in addition to a fixed charge of $12 per month, roughly in line with the national average. These costs would result in an average monthly electricity bill of $237. This bill could reach $387 in a month of high electricity usage, putting an especially large strain on the household budget. Figure 1 shows the assumed usage of our example household and the resulting monthly bills over the course of a year.

Figure 1. Monthly Electricity Usage and Bill for a Sample Household

Notes: The assumed price of electricity for this household is 15 cents per kilowatt-hour, plus a fixed monthly charge of $12.

If this example represents a three-person household with an annual income of $38,730 (150 percent of the federal poverty level), then the household’s energy burden—the cost of energy as a percentage of annual income—would be 7.3 percent.

Researchers often classify an energy burden as high when it’s greater than 6 percent and severe when it’s greater than 10 percent. The average energy burden for low-income households (defined as 200 percent of the federal poverty level or less) is estimated as 8.1 percent, according to a report from the American Council for an Energy-Efficient Economy. The same report finds that 13 percent of all US households face a severe energy burden.

Let’s consider five different types of programs that could help our example household.

Low Income Home Energy Assistance Program (LIHEAP)

LIHEAP is a federal program that makes annual grants to states, Native nations, and US territories to assist low-income households with electricity bills. While most of the funding for LIHEAP comes from the federal government, states have significant latitude to set rules. The administration of the program is often a joint effort between the state, utilities, and nonprofits. The program pays for a portion of the recipient’s electricity bills, and thus provides direct help in making electricity more affordable. The amount LIHEAP offers differs depending on state policies and the status of the household according to state LIHEAP rules. For our example household, LIHEAP would contribute $300 to help pay the electricity bill for January.

Energy Efficiency

Energy-efficiency programs subsidize or cover the entire cost of upgrading a home to boost energy efficiency, such as improvements to the building envelope (e.g., insulation, air sealing) or the installation of a more efficient heating, ventilation, and air-conditioning system. Energy-efficiency programs can be operated by utilities, states, nonprofits, or other third parties. For the purposes of our example household, let’s assume that improvements in energy efficiency reduce electricity usage by 5 percent in a typical month and by 15 percent in particularly hot or cold months (we’ll assume these extreme-weather months are January, February, July, August, and December). Note that our predicted savings are slightly conservative compared to estimates of energy savings from the Weatherization Assistance Program. The entire cost of upgrading our example home would be covered through an energy-efficiency program.

Demand Response

Demand response programs offer a financial incentive for households who agree to let a utility or program administrator reduce their electricity usage during periods when demand for electricity is highest. Demand response programs typically are in effect a limited number of times per year, for a few hours each time. Demand response programs are run either by utilities or companies that specialize in these types of programs.

For example, the ConnectedSolutions program operated by National Grid, a utility in the Northeast, offers customers financial incentives to connect smart thermostats to central air conditioners or central heat pumps. On hot summer days, the utility automatically sends a signal to a participating thermostat to precool the home by 3°F before peak electricity demand and a signal to increase the thermostat setting by 4°F during peak demand. Peak events last three hours. In this way, the program reduces peak demand, creating cost savings across the electric system, while minimizing the effect on participants’ comfort.

Assuming the typical incentive level for a demand response program that uses smart thermostats, our example household could receive a $50 incentive in a month like February.

Ratepayer Bill Assistance

Many states or utilities have programs that offer discounts to low-income households that qualify. These programs can vary greatly and are run by utilities. Our example household could receive a fixed discount of $10 per month through a program like this.

Levelized Bill Program

Utilities often offer programs that remove monthly variation in the total electricity bill of a household. This approach fixes, or “levels,” the electricity bill across the year, provides certainty about the cost of a monthly bill, and can help a household budget accordingly. The details of these programs vary greatly. For our example household, a levelized bill program would offer the same bill amount each month but would not change the total amount that the household pays annually.

Combined, these five programs would reduce the example household’s average monthly electricity bill by $67 (28 percent) and reduce the highest electricity bill by $192 (50 percent). This household’s overall energy burden would be reduced by 2.1 percent—from 7.3 percent to 5.2 percent. Each program has a relatively small individual impact and may not be enough to help this family avoid falling into arrears. However, the combined impact of all five of these programs is substantial; the family no longer would have a high energy burden and would see a large reduction in its highest monthly bill (Figure 2).

Figure 2. Decreases in Average Monthly Electricity Bill and Highest Monthly Bill by Program

Figure 3 shows the example household’s monthly bills with and without the assistance of these programs. Note that the bill for January effectively becomes zero, since the energy-efficiency program reduces the bill to less than the $300 credit from LIHEAP that applies in January. The February bill declines because of the leftover LIHEAP credit, in addition to the $50 incentive from the demand response program.

Figure 3. Monthly Electricity Bills with and without Affordability Programs

Additional Tools Can Help Reduce Household Electricity Bills

The example household that we’ve highlighted here utilizes five programs to reduce the family electricity bill. However, policymakers can draw from an even larger set of potential tools. Table 1 highlights 15 potential action items that decisionmakers at state legislatures, regulatory agencies, and utilities may consider to address affordability. The action items are divided into five categories:

enablers, which can enhance and inform all other tools that help address affordability
bill discounts, which are programs that directly reduce customers’ electricity bills
bill management programs, which change how customers’ bills are structured
distributed energy resource programs, which directly reduce customers’ electricity bills while offering benefits to the electric grid
policies set by states and utilities that can affect affordability, such as required deposits or policies on disconnection for nonpayment

Stay tuned for future exploration of this topic from Resources for the Future that will explore some of these tools in greater detail.

Table 1. Tools that Policymakers Can Use to Address Affordability

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