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28 Aug 2012

Alleviating Energy Poverty in Ireland: an Efficient, Sustainable Approach

Alleviating Energy Poverty in Ireland: an Efficient, Sustainable Approach

Given rising energy prices and the continuing economic malaise, governments across Europe need to find new ways to alleviate energy poverty. Jim Scheer proposes a more efficient way of alleviating energy poverty in Ireland. 

The Irish Government spent over €2.5 billion between 2004 and 2011 on policy interventions aimed at alleviating energy poverty. Annual expenditure on energy subsidies to qualifying households (more than 600,000) increased by a factor of 2.5 over the same period – to over €465 million in 2011 alone. In contrast, the Government spent €20 million per year on average over the last three years on upgrading dwellings to improve their energy efficiency.

According to analysis outlined in Ireland’s Affordable Energy Strategy, the number of energy-poor households in 2009 (on the basis of the 10% expenditure definition) was approx. 317,000, or over 20% of all households, including over 151,000 in severe energy poverty (spending over 15% of income on energy services), and over 83,000 in extreme energy poverty (spending over 20%).

It is clear that energy poverty is a major problem for many Irish households. Given current economic conditions, optimal use of available resources to address the problem is crucial. A review of current policy and expenditure is urgently needed.

Rates of energy poverty are affected by three main factors: household income, the price of energy, and the energy efficiency of the dwelling (and energy-using appliances). Since Ireland imports around 90% of its primary energy requirement, and in the context of an open and competitive energy market, the Irish Government has limited control over energy prices charged to final customers. The two areas where government policy can make a strong impact are redistribution of income via the welfare system, and improvement of the energy efficiency of homes occupied by the energy-poor.

Fuel allowances may be a necessary way of alleviating energy poverty. They relieve the more immediate need for warmth in the worst-affected households, but the benefits provided are transient, while the costs are continual. Given high unemployment, likely energy price rises and the energy-inefficient dwelling stock, the expenditure needed is likely to increase in coming years. Such expenditure could rapidly become unsustainable unless an alternative, more permanent solution is found.[1]

As highlighted by Ireland’s Economic and Social Research Institute (ESRI) and others, the problem of energy poverty may be more permanently addressed by tackling its causes. It is broadly accepted that increased spending on upgrading the dwelling stock offers the best potential to energy-poverty-proof the housing stock.

To limit the impact of fuel price increases and to ensure sustainable alleviation of energy poverty, new housing needs to be energy-efficient and the existing housing stock needs to be retrofitted so as to be energy-efficient.

A new study, ‘Alleviating Energy Poverty in Ireland – An Efficient Approach for Future Government Expenditure’, [2] explores the potential to curb the escalating costs of dealing with energy poverty in Ireland by considering an alternative form of welfare delivery that could both reverse the current spending trend and provide a lasting solution to energy poverty.

Currently, the Irish fuel-poverty payments bear no relation to the energy efficiency of the dwelling. This is inequitable, since those on (relatively) higher incomes, living in more efficient homes, receive the same subsidy as the lowest income earners in the least efficient homes. This inequity may be exacerbated by the likelihood of a correlation between low incomes and poor quality, less efficient housing. Further, there are no differences in payment as between the poorest and wealthiest subsidy recipients.

It would be politically sensitive to remove an average annual subsidy of approximately €690 from households not categorised as energy-poor. The analysis undertaken in this study therefore proposes a subsidy scheme that would replace the current flat-rate scheme with one in which all existing recipients would retain a subsidy (at least in part), with increases and decreases applied according to new criteria linked to both their income and the energy efficiency of their dwelling.

A cost-benefit analysis then investigates the extent to which dwelling upgrades for improved energy efficiency, in the context of both the existing and proposed subsidy schemes, would result in welfare gains.

It is shown that, on the basis of income and dwelling energy efficiency, a reallocation of the available funds – without any additional annual expenditure by government – would significantly reduce both the overall severity of energy poverty and the number of households in energy poverty. Under the proposed scheme:

  • Over 11.5% (27,054) of households would no longer suffer energy poverty
  • More than 35% (33,321) of those in extreme energy poverty are moved to lesser categories
  • Over 38% (20,528) of those in severe energy poverty are moved to a lesser category, or out of energy poverty altogether

Such a reallocation would reduce both the overall severity of energy poverty and the number of households in energy poverty. While some households would need to allocate a greater proportion of disposable income to energy, given their increased ability to pay (higher relative income and lower energy demand due to a more efficient dwelling), the marginal economic losses felt by these households would be outweighed by the gains apportioned to those worst affected by energy poverty.

When the cost of upgrades is equated with the benefits, including energy and emissions reductions, comfort gains and health improvements, a strongly positive net present value (NPV) is indicated for all dwelling upgrade scenarios. Cost-benefit ratios range from 1.9 to 2.9. Under the reallocation scheme, these results are enhanced by more than 60%, due to the savings accruing to the Irish Exchequer in the form of subsidy reductions applied to post-upgrade dwellings. If a strong upgrade investment programme is undertaken, the cumulative subsidy savings for the Exchequer over a 35-year period amount to €2.9 billion.

Energy efficiency improvement programmes have generally been evaluated on the basis of the energy saved and greenhouse-gas emissions abated. However, energy efficiency improvement brings a wide range of non-energy benefits. The analysis demonstrates that an upgrade programme to improve the energy efficiency of dwellings occupied by those in receipt of government subsidies can provide substantial net social gains.

Protecting and improving health, reducing health inequalities, saving energy and mitigating climate change are all intertwined. The range of benefits available through improving the stock of housing occupied by the energy-poor includes:

  • warmer, drier, healthier homes
  • improved comfort, wellbeing, and physical and mental health
  • energy cost savings (leading to improved energy affordability)
  • increased asset (dwelling) values
  • local community rejuvenation and local job creation
  • improved work and school attendance, and improved education due to reductions in forced mobility

Society in general benefits from:

  • reduced greenhouse-gas emissions and air pollution
  • improved economic activity and increased employment
  • reduced costs for the health system
  • general social improvements such as reduced inequality

Government and energy suppliers benefit from:

  • lower government and utility energy subsidies
  • improved energy security
  • reduced spending on cut-offs, notices, arrears and bad-debt write-off

As regards the health benefits, a growing body of evidence shows the link between energy poverty, cold exposure and increased rates of mortality and morbidity in energy-poor households. People who cannot afford adequate energy for heating, lighting, cooking and other energy uses tend to suffer a wide range of negative effects. These include poor physical and mental health (including long-term health effects on children), and even death; increased financial difficulties and stress due to inability to pay energy bills, and, in general, a poor quality of life.

Ireland has one of the highest rates of excess winter mortality (EWM) in the EU, estimated at between 1,500 and 2,000 deaths yearly. Clinch and Healy (2000) linked over 50% of these deaths to the poor quality of the Irish housing stock (the number of cold, damp dwellings). Countries with relatively mild winters, such as Ireland, Greece, the UK, Spain and Portugal, have higher EWM rates than many colder countries, such as Finland, which have long maintained higher building standards.

The greater the improvement to the energy efficiency of a dwelling, the higher the total costs. However, even for the deepest retrofit modelled (average dwelling cost €21,000) the benefits stemming from comfort gains, energy savings, emissions reductions, health improvements, etc, strongly outweigh these additional costs.

Cost-benefit analysis of tackling energy poverty shows that 42c of every €1 spent on tackling energy poverty is returned in savings on health expenditure on all householders. [Prof Christine Liddell:]. In a recent cost-benefit analysis of an upgrade programme for low-income households in New Zealand, the health benefits were found to far outweigh the value of energy savings, accounting for approx. 99% of total estimated benefits.

Concerning employment, an estimated 60% of total expenditure on upgrades for the energy-poor is attributable to labour costs. This suggests that around 13 jobs could be directly supported per €1 million invested, or 22.5 direct and indirect jobs. Annual expenditure of €143 million on upgrades could support over 3,200 jobs each year for the 15-year programme that is modelled.

In addition, deeper retrofits will accumulate more energy and CO2 savings over their lifetime, thus contributing to Ireland’s challenging energy saving and emission reduction targets.

The study looks at supply-side and government financial constraints, the number of suitably qualified delivery agents required, and other factors. However, the results of the analysis point to a more efficient way of alleviating energy poverty in Ireland. Similar (or alternative) reallocations should be further investigated in theory and tested in the field in order to find an economically and politically optimal schema. Then, subject to favourable results, the maximum available funds should be committed to improving the energy efficiency of subsidised households on a comprehensive scale.

In brief, we need for the time being to heat the ‘leaky’ dwelling, but, as soon as possible, we must plug the leaks!

[1] To illustrate this, it is worth noting that in England, despite policies such as Warm Front and the Winter Fuel Payment, the number of fuel-poor households soared between 2004 and 2010 from 1.2 million to 4.6 million. In 2008/09, the increase in fuel poverty was attributed to increased energy costs. It has been estimated that, in the long term, energy costs could increase a typical annual energy bill by 50% (Fuel Poverty Advisory Group, 2010, eighth annual report).

[2] A study submitted to Trinity College Dublin as part of an M.Sc in Economic Policy Studies (July 2012).