Energy affordability back to pre-crisis levels
Energy bills are becoming more affordable again. On average, households are expected to spend 4% of their disposable income on energy over the next three years, following a peak of 7% after the outbreak of the war in Ukraine. Roughly one third of households in the lowest income category is still financially vulnerable to rising energy costs, although this is significantly lower than the 55% figure in 2022.
© ANP
This is according to a new ‘energy affordability’ indicator, released by DNB along with the Spring Projections in June. This indicator reflects the expected evolution of energy bills compared to the expected evolution of average household income, measured as the percentage of disposable income spent on energy. A drop in the indicator therefore represents an improvement in energy affordability. For most households, energy is a major monthly expense. The 2022 energy crisis underscored the vulnerability of many households to an abrupt rise in energy prices.
Figure 1 - Energy affordability indicator 2019-2026
Energy affordability to fluctuate in next three years
Following a sharp deterioration two years ago, energy became more affordable last year. This trend is expected to continue this year, with energy affordability potentially returning to pre-crisis levels. Over the next two years, energy affordability is expected to hover around current levels, with a slight deterioration in 2025 and a slight improvement in 2026. Households are expected to spend 3.8% of their disposable income on energy in 2024, 4.0% in 2025 and 3.6% in 2026. These levels are similar to before the energy crisis: in 2021, households spent 4.0% of their disposable income on energy. This rose sharply to 6.8% at the height of the crisis.
Electricity bills to rise, while gas bills are likely to fall
Energy affordability will improve in 2024 mainly due to rising incomes; the improvement in 2026 can be ascribed to expected lower energy bills. Expected income growth will be 1% in 2024, 2025 and 2026 compared to the previous year. Meanwhile, energy bills will continue to fluctuate. Gas prices are expected to fall in the coming years. These estimates are based on gas futures trading, and are subject to uncertainty. Under current policy, taxes on natural gas are set to rise. However, the new outline coalition agreement between PVV, VVD, BBB and NSC calls for a reduction in the energy tax on gas in the coming years. This proposed reduction has not yet been incorporated in the indicator, as the relevant policy has not yet been adopted.
If the proposed reduction were included in the indicator, this would result in a slight improvement in affordability. Households would then spend an average of 3.7% and 3.3% of their disposable income on energy in 2025 and 2026, respectively, compared to 4.0% and 3.6% without the tax reduction.
Electricity bills are expected to rise in the coming years. Although taxes on electricity are falling, this is more than offset by higher electricity prices and rising network costs. Network costs will rise by 19% per year on average in the coming years (Netbeheer Nederland, 2023) due to heavy investments needed for the expansion of the electricity grid.
Substantial proportion of lowest earners remain financially vulnerable to energy costs
As energy affordability improves, the proportion of households that are financially vulnerable to higher energy costs is also expected to fall in the coming years. However, energy costs will remain problematic for low-income households. A household is considered financially vulnerable to energy costs if its energy bill exceeds 10% of disposable income. The number of such vulnerable households is expected to fall from 810,000 to 560,000 in 2024 (8.1% of all households). According to the projection, this number will rise somewhat in 2025, before falling to 430,000 (6.3% of all households) in 2026.
In the lowest income group (lowest income quintile), a quarter of households are estimated to be financially vulnerable to energy costs in 2026, compared to 30% in 2024 and 55% in 2022. This does not take into account the renovation of social housing, which could potentially result in lower energy costs for some households in the coming years. Financial vulnerability will also be reduced if the new government lowers the energy tax on natural gas as proposed. Previous research (DNB Analysis 'Van crisis naar kans') shows that financial vulnerability to higher energy costs is especially common among tenants.
See here for our explanation of the calculation methodology behind the new energy affordability indicator.
Energy affordability indicator - methodology