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Glossary · Energy industry & energy transition

Affordability

Affordability electricity price Energy Poverty security of supply Climate protection Governance electricity price components

In the energy system, affordability refers to the ability of households, businesses and public institutions to use electricity, heat and other energy services at costs that do not overstretch their economic capacity to act. The term does not stand for a particular price level. It describes the relationship between energy costs, income, value creation and investment needs, as well as the politically determined distribution of costs. There is no generally binding metric for affordability. Anyone using the term should therefore specify whose burden is meant and which costs are included.

In Germany, affordability is also anchored in law, albeit under different wording. Under section 1(1) of the Energy Industry Act (Energiewirtschaftsgesetz, EnWG), the grid-bound supply of electricity, gas and hydrogen is to be as secure, low-priced, consumer-friendly, efficient, environmentally compatible and greenhouse-gas-neutral as possible. These objectives stand side by side with equal rank and can conflict with one another. The provision does not specify how they are to be weighted in an individual case. That happens only in specific laws, ordinances and regulatory decisions. No particular maximum price can therefore be derived from section 1 EnWG.

In the electricity system, affordability is often tied to the electricity price, that is, to cents per kilowatt-hour or to the monthly electricity bill. This view is understandable but incomplete. For a household, what matters is how high the bill is relative to disposable income. An industrial company compares the electricity price with its production and with international competitors. It also asks how it can hedge against price fluctuations and whether processes can be electrified. Municipalities, hospitals or transport operators need predictable operating costs that do not overburden public budgets. A kilowatt-hour has the same physical content for all these actors, but a very different economic impact.

Price, costs and burden

Affordability must be distinguished from several neighbouring concepts. For households, the end-customer electricity price generally consists of a variable price per kilowatt-hour and a fixed base price independent of consumption. The Federal Network Agency (Bundesnetzagentur) divides it into three components. The competitive component covers procurement, sales and margin. The infrastructure component covers the regulated network charges and the charges for metering point operation. In addition there are taxes such as value-added tax and electricity tax. The price also contains levies and surcharges, such as the concession fee and the surcharges under the Energy Financing Act (Energiefinanzierungsgesetz). Affordability, by contrast, asks whether these costs are bearable and how they are distributed.

Wholesale prices and end-customer prices can be far apart. A low power exchange price can coincide with high end-customer prices. This is the case, for example, when network charges and levies weigh heavily or when suppliers bought their electricity earlier at higher prices under long-term contracts. Conversely, a high exchange price barely burdens some consumers, for example when they are hedged over the long term or can shift their consumption in time.

Energy poverty is also not the same as a lack of affordability. The EU Energy Efficiency Directive (EU) 2023/1791 contains, in Article 2, point 52, the first EU-wide definition. According to it, energy poverty exists when a household has no access to essential energy services that provide a basic standard of living and health. These include adequate heat, hot water, cooling, lighting and energy to power appliances. As causes, the definition names a combination of factors, at a minimum unaffordability, insufficient disposable income, high energy expenditure and poor energy efficiency of homes. Affordability encompasses this social dimension but reaches further. It also concerns energy-intensive businesses, the housing sector and public infrastructure. It also raises the question of how the investments for transforming the energy system are financed. An energy system can appear affordable on average and still overburden certain groups.

Affordability also differs from cost-effectiveness. An investment in insulation, a heat pump, photovoltaics or a storage system can pay off over its lifetime and yet, for low-income households, fail because of the initial investment. Conversely, low running prices can make investments unattractive even though these would reduce the costs of the overall system. Affordability therefore always has a time dimension. What matters is who bears the initial costs, who benefits later and what financing options are available.

Why affordability matters in the electricity system

Electricity arrives via lines and can hardly be replaced in many applications. Lighting, cooling, communication, water supply, transport and production depend on a reliable electricity supply, and increasingly this also applies to heat. With the electrification of transport, buildings and industry, the electricity system becomes more important for the entire economy. A higher electricity consumption does not automatically mean a higher overall burden. If an electric car replaces petrol or a heat pump replaces heating oil, electricity demand does rise. However, total final energy demand and fuel costs can fall. For affordability, what then counts is the overall balance of energy costs, not just the electricity bill.

At the same time, the timing of consumption becomes more important. Electricity does not cost the same to provide in every hour. Wind and solar plants have low variable costs, but their generation fluctuates with weather and time of day. Grids must be designed for load peaks. Power plants, storage and flexible consumers balance the differences between generation and consumption. Affordability is therefore increasingly linked to flexibility, load profiles and grid expansion. Two households with the same annual consumption can cause different system costs. This is the case when one draws electricity mainly at peak times and the other shifts its consumption to hours with plenty of wind and solar power. Whether this difference shows up on one's own bill depends on the tariff and on the metering technology.

For businesses, affordability is closely linked to predictability. A single high price on the power exchange is less problematic than permanently uncertain costs when investments are planned over years or decades. Chemicals, steel, paper, glass, data centres and rail transport need not only low average prices. They also need reliable rules on network charges, levies, relief measures, power purchase agreements and self-supply. Unclear cost paths can delay investments even when technical solutions are available.

Visible and shifted costs

A common mistake is to equate affordability with the lowest possible end-customer prices. The state can lower prices by reducing taxes, financing surcharges from the budget or relieving certain consumer groups. The costs do not disappear as a result; they are merely distributed differently. They then end up with taxpayers, with other consumer groups, with future households or with businesses that receive no relief. A price reduction can make social sense if it specifically prevents overburdening. But it can also set wrong incentives, for example if it makes consumption cheaper in times of scarcity or weakens investments in efficiency and flexibility.

A current example from Germany shows this shifting. In 2026, the federal government subsidises the transmission grid charges with 6.5 billion euros from the Climate and Transformation Fund. According to an analysis by the Federal Network Agency, network charges for household customers at the 15 network operators with the largest populations fall as a result by just under 2 cents per kilowatt-hour on average. Because network charges differ regionally, the subsidy has different effects depending on the network area. Whether one's own electricity price actually falls also depends on the supply contract. Similarly, since 2026 the gas storage levy has been paid from the federal budget instead of through the gas price. In both cases the bill falls, while part of the costs passes to public budgets.

Conversely, rising electricity prices do not always show that the energy system as a whole is becoming less affordable. When fossil fuels become more expensive, CO₂ costs rise or old plants have to be replaced, costs often appear where they were previously hidden. Climate damage, import dependencies or crisis reserves also cause costs, even if they do not appear on the electricity bill. The analytical question is therefore which costs become visible in which instrument. Network charges finance the grid infrastructure. Procurement costs reflect market prices and contract strategies. Taxes and levies serve fiscal or political purposes. Support instruments distribute investment costs. Each of these components has a different function.

With network charges, this distribution question becomes particularly clear. Expanding and operating the electricity grids is necessary to integrate new generation plants, heat pumps, charging points and industrial connections. If grid costs are levied predominantly per kilowatt-hour consumed, consumers with high electricity use pay more, even if their load may be beneficial to the grid. If costs are distributed more heavily via connection capacity or base prices, the burden on low-consumption households rises. No method is neutral. The rule decides which consumption counts as cost-driving and which flexibility is rewarded.

Distribution, governance and political trade-offs

Affordability is an institutional concept because it depends on rules. Markets alone do not decide who bears which electricity costs. The legislature sets taxes, levies, support mechanisms, relief measures, basic supply obligations and social benefits, as well as the framework for network charges. The regulatory authorities determine which network revenues are permissible. Transmission and distribution system operators implement technical requirements. Suppliers procure electricity and design tariffs. Households and businesses respond to prices to the extent that they are technically, financially and organisationally able to. This distribution of responsibilities is a matter of governance.

A practical problem follows from this: the same measure can affect affordability differently depending on its design. Dynamic electricity tariffs relieve consumers who can shift their consumption. By contrast, they can unsettle households with little flexibility if the risks are poorly limited. Reduced industrial electricity prices can enable the transformation if they are tied to investments and consumption behaviour. If they are granted permanently and across the board, they mainly shift costs. Targeted social tariffs or transfer payments can reduce energy poverty if they reach households in need. They become inefficient if they reflect actual need poorly.

Affordability is also linked to security of supply and climate protection. A secure electricity supply costs money. Grids, reserve capacities, system services, storage, firm capacity and operational management must be financed. A climate-compatible energy system also costs money, especially in the investment phase. The trade-off is therefore not about whether costs arise. It is about which decisions cause which costs and how risks are distributed. Omitted investments can ease bills in the short term and lead to higher costs later, for example through grid congestion, fossil import dependence or costly crisis interventions.

Typical oversimplifications

In public debates, affordability is often pinned to a single indicator: the household electricity price, the industrial electricity price or the amount of state relief. Such figures are useful when it is clear what they include. They mislead when they mix different consumer groups, contract types, consumption profiles and state financing. An average price says little about households that consume entirely different quantities because of a night storage heater, a heat pump or an electric car. Nor does it say much about tenants who pay for their heat through service charges and cannot decide on investments in the building.

Another oversimplification consists in looking at electricity costs separately from other energy costs. When climate protection is implemented through electrification, part of the expenditure shifts from oil, gas or fuels to electricity. The electricity sector may then appear more expensive, even though the overall energy service becomes cheaper or more stable. To assess this, one must consider final energy, efficiency and investment costs together. Electric motors and heat pumps need significantly less final energy for the same service than combustion engines or heating boilers. A kilowatt-hour of electricity thus achieves more in these applications than a kilowatt-hour of fuel.

Equating affordability with lower consumption is also imprecise. Efficiency lowers costs when the same service is provided with less energy. By contrast, anyone who simply consumes less may have to forgo comfort, production or participation in society. The EU definition of energy poverty expressly counts such restrictions on heat or lighting as part of the problem. In the electricity system, additional consumption can even reduce costs if it is flexible, uses renewable generation and does not burden the grids at peak times. What matters then is not the annual quantity alone, but the interplay of energy quantity, capacity, timing and controllability.

Affordability thus describes the bearable financing of energy services under real technical and institutional conditions. The term becomes precise when price components, distributional effects, time profiles and investment needs are disclosed. It loses its explanatory power when it serves only as a demand for low prices and leaves open which costs are thereby avoided, shifted or redistributed.

Sources

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Edited by eCMS on 11.11.2026 15:34

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.