Fuel poverty in Hungary
In his second article for the EU Fuel Poverty Network, Sergio Tirado Herrero discusses the prevalence of fuel poverty in Hungary, drawing on his recently concluded doctoral research on fuel poverty alleviation as a co-benefit of residential energy efficiency investments.
Fuel poverty in Central and Eastern Europe (CEE) has been associated with the economic and political changes of the early 1990s, which progressively brought energy prices to full-cost recovery levels, affected household incomes and left a legacy of energy inefficient residential buildings (Duncan, 2005; Ürge-Vorsatz et al., 2006; Buzar 2007). The inability of the region’s post-1989 democratic governments to provide an adequate level of social protection, as well as their failure to develop adequate policy frameworks for improving the energy efficiency of the residential stock occupied by low-income households, have been also pointed as additional contributing factors to the emergence of domestic energy deprivation in this region (Buzar, 2007).
Against this background, it is suspected that, compared to Western Europe, a significant percentage of households living in the post-socialist countries of Central and Eastern Europe are subject to some degree of enforced deficit of domestic energy services (Boardman, 2010). This may well be the case of Hungary, a land-locked, energy dependent CEE nation where domestic heating is based to quite a significant extent on pricey Russian or Russia-transiting natural gas (KSH, 2008; OECD/IEA, 2012).
Without disregarding the importance of low incomes and poor domestic energy efficiency, the current state of Hungary’s fuel poverty is primarily explained by the recent evolution of domestic natural gas prices, which experienced a nominal four-fold increase between the years 2000 and 2011. This price hike is primarily a consequence of Hungary’s weak position as an importing nation depending almost entirely on prices set by its suppliers from the former Soviet Union. But it is also the result of regulated domestic natural gas tariffs in the early 2000s, which led to the accumulation of losses in the balance sheets of distribution companies and had to be reverted through an increase in regulated prices decreed in 2006 that has continued since then (Kessides, 2000; E.On Földgaz, 2008). Further causes are the increase in VAT (from 20 to 25 and then 27%) and the cost of upgrading of the country’s strategic natural gas storage capacity, which has been passed onto final consumers (OECD/IEA, 2007).
In spite of this perturbing trend in domestic energy (gas) prices, it was not until 2010 that the first piece of research focusing specifically on the topic was published in Hungary – the report Fuel poverty in Hungary. A first assessment (Tirado Herrero and Ürge-Vorsatz, 2010), an exploratory study commissioned by the Hungarian NGO Védegylet – Protect the Future Society and undertaken by the Center for Climate Change and Sustainable Energy Policy (3CSEP) at Central European University (CEU). The Hungarian Energia Klub produced later on a paper with a proposed definition of fuel poverty in Hungary and pointed at the low energy efficiency of the residential stock as main cause (Fülöp and Fellegi, 2012). My dissertation, defended in February 2013, provides a comprehensive assessment of the extent, evolution and characteristics of the problem and quantifies the relevance of fuel poverty alleviation as a co-benefit of residential energy efficiency measures as climate investments.
To estimate the current dimension of the problem in Hungary, I estimated expenditure and consensual fuel poverty rates following the two methodologies commonly considered in the literature. Results suggest that between 10 to 30% of the Hungarian population (1 to 3 million people) were in fuel poverty as of the second half of the 2000s – see Figure 1. The width of the range is explained by the substantial differences in the rates calculated by the two measuring approaches:
- The expenditure approach, according to which a household is in fuel poverty if its actual energy expenditure is more than 15% of a household’s annual income. This fuel poverty line is roughly equivalent to the median energy burden of the lowest 3 income deciles of the sample in 2005 (14.6%) and in 2008 (16.9%); additionally, for comparative purposes Figure 1 also displays fuel poverty rates based on both a 10 and 20% energy expenditure vs. household income lines. This methodology is based on microdata from 2005 and 2008 from the Hungarian Household Budget Survey (HBS);
- The consensual or self-reported approach (Healy, 2004), according to which a household is in fuel poverty if it declares to be unable to keep its home adequately warm in the winter. This methodology relies on aggregated results retrieved from the EU Survey on Income and Living Conditions (EU-SILC).
Note: the discontinuous line corresponds with the forecast increase in expenditure-based rates estimated for 2008-2011
Source: Tirado Herrero (2013)
THREE TYPOLOGIES OF FUEL POVERTY
Even though natural gas prices are a key element of the analysis, quantitative and qualitative data indicate that three broad types of fuel poverty connected with different fuels exist in present Hungary. Their emergence and developments is the result of negative path-dependencies and inherited legacies – though not always from the pre-1989 socialist State – in combination with other factors:
- Conventional/natural gas fuel poverty: path-dependencies and inherited legacies are evidenced by the poor thermal performance of the currently existing residential stock, part of which was built during times when energy was subsidised by the socialist State. This legacy is particularly negative in the case of the relatively large single-family houses built prior to the 1990s. Many of these houses were built informally by families often working manually with relatives, friends and acquaintances because market-oriented developments were rare until 1989 (Hegedűs et al., 1994), which is pointed a likely cause of its poor energy performance. In addition to that, the gas dependency of Hungary’s household sector is explained by the discovery of large domestic gas reserves in Hungary during the 1960 and 1970s (Kessides, 2000) and by the massive fuel switching between 1990 and 1998 that replaced most tile stoves and coal and oil boilers with more efficient gas boilers, a process fuelled by subsidised domestic gas prices (Energia Központ, 2008). The combination of these various factors explains why a fraction of Hungarian households are trapped in large homes that cannot be heated adequately because of the steadily increasing price of imported natural gas.
- Rural/firewood fuel poverty: rising natural prices and the poor energy efficiency of the housing stock, especially of the above mentioned single-family houses built before the 1990s, also explains the growing number of households substituting natural gas by firewood as a coping strategy for dealing with unaffordable domestic heating costs. However, switching fuels is only possible when the conditions are adequate, i.e., households capable to operate the stoves on a daily basis and with access to firewood supply, stoves, storage space, etc. A suspected important element of this firewood-related fuel poverty is the lower income and fewer economic opportunities of the Hungarian rural population. Thus an extreme version of this type of fuel poverty has been identified for the poor Roma population living in rural areas, one of the most deprived social groups of the country.
- Panel/DH fuel poverty: in prefabricated panel dwellings served by district heating (DH), socio-technical legacies are physically embedded in the structure of buildings in the form of one-pipe, single-loop vertical systems (i.e., radiators in the same position on different floors are connected vertically) where disconnecting individual households is technically impossible (OECD/IEA, 2004). As the flagship of socialist housing policies, prefabricated buildings are probably the best example of how the pre-1989 State considered domestic energy as a right of the citizens rather than as a scarce resource to be allocated with economic criteria. In modern Hungary, the fuel poverty experienced by households living in panel blocks connected to DH defies conventional notions in the sense that it is not experienced in the form of a cold indoor environment (often the opposite, in fact), but as higher than average domestic heating costs, which may translate into reduced consumption of other basic goods and services (Tirado Herrero and Ürge-Vorsatz, 2012). Households may also incur in payment arrears, which results in indebtedness and risk of disconnection. This transfer of the energy affordability problem to the providers’ side also plays a role in the persistence of fuel poverty in panel blocks because declining DH revenues prevent the upgrading of generation and distribution systems, and may increase DH costs among compliant households.
AN INSUFFICENT POLICY FRAMEWORK
Even though fuel poverty may be affecting every fifth Hungarian person and has been on the rise since the mid-2000s, it remains unattended by policy-makers. Domestic energy prices (or, more widely, energy affordability problems) are subject to public and political debate but until recently they have seldom been discussed and addressed as fuel poverty issues. However, this does not imply that society and institutions are unaware of the increasing difficulties experienced by households to afford their domestic energy needs, nor that there is a policy void.
A few elements of Hungarian energy, social and climate policies have been identified as having a positive impact on the domestic economies of fuel poor households. They consist of residential energy efficiency programs (mostly shallow retrofits concentrated in prefabricated panel buildings), direct support measures (e.g., price subsidies, income transfers, reduced VAT for DH, etc.) and, more recently, reductions in utility prices mandated by the government. However, these measures are mostly palliative as they address to a marginal extent the energy efficiency of Hungarian homes as a key underlying cause of fuel poverty. They are also not enough well targeted since a broad range of gas and DH consumers primarily benefit from price support measures, with only some consideration towards the vulnerable character of households; and they have so far remained poorly integrated with other policy objectives like energy security and climate change mitigation.
The tremendous increase in natural gas prices reported since the year 2006 raises concerns about the future affordability of domestic energy services in Hungary. If prices keep the upward trend reported in recent years, the country may be facing soon a much larger problem of fuel poverty affecting a significant fraction of its middle class. However, the alleviation fuel poverty emerges as an important argument for advancing residential energy efficiency policies for climate and other purposes. Otherwise, there is a risk that Hungary will fail to meet its long-term mitigation targets because, as forecasted by the European Commission (EC, 2012), a maximum global temperature increase target of +2° C (as compared to pre-industrial levels) may require developed economies to deliver 80 to 95% emission reductions by 2050.
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