Notes on the need to support energy efficiency in low-income households – VEET review 2015
The Victorian Energy Efficiency Target (VEET) scheme and low-income households
Background: The need to support energy efficiency in low-income households
There is a clear case for supporting energy efficiency in low-income households.
People on low incomes use less energy but spend more of their income on energy
Low-income households use less energy on average than higher income households (ABS 2015). However, energy costs are regressive and while people in the highest decile of the Australian income distribution only spend around 1% of their income on energy, those in the lowest decile spend around 7% on average (Azpitarte et al. 2015 forthcoming).
Low-income households have less energy efficient homes and appliances
For example:
· low wealth[1] households are less likely to have insulation, window treatments or solar electricity or hot water installed in their dwellings compared to other households (ABS 2015)
· households with the lowest annual incomes in Victoria have a lower prevalence of insulation (65%) than households with the highest annual incomes (81%) (ABS 2009)
· households with the lowest annual incomes are more likely to have main fridges 10 years or older (37%) than households with the highest annual income (22%) (ABS 2009)
· 77% of low-income homes visited by the NSW Home Power Savings Program had gaps in doors and windows (HPSP 2013, reported in ACOSS 2013).
There are clear benefits to energy efficiency
Household cost saving
Raising a home from a 2-star to 5-star energy rating can result in a 32% energy saving, which could save households up to $600 a year (OMH 2013). This is of particular benefit to people struggling to make ends meet, such as the 30% of people reporting they are unable to pay their energy bills on time, who are on a low income. Recent data from the ESC (2014) shows that 71% of people in energy retailers’ financial hardship programs had a concession, suggesting they are highly over-represented in hardship.
Health and wellbeing
Non-energy benefits of household energy efficiency include increased home comfort and conditions that support mental and physical health and wellbeing. This particularly applies among vulnerable groups such as children, the elderly and those with pre-existing illnesses (IEA 2014). People with acute respiratory conditions and chronic conditions are likely to benefit most.
Energy efficiency is particularly beneficial for those with very high or very low energy expenditure
Energy efficiency has a particularly important role to play for people who either have high energy expenditure or are limiting their energy usage to the detriment of their health and wellbeing.
Our research (Azpitarte et al. 2015 forthcoming) shows that:
· some households are rationing their energy use to the detriment of their health and wellbeing. For example 34% of the people unable to heat or cool their home when needed are on a low income.
· over one-third of those people on low incomes with relatively high energy expenditure are aged 65 and over
· households with a member with a disability are highly vulnerable to energy-related hardship
Low-income households face greater barriers to making energy efficiency improvements
The barriers to energy efficiency in residential premises have been discussed elsewhere (see, for example, IEA 2009).
Many low-income households face greater barriers to making energy efficiency improvements to their homes and appliances. Barriers to uptake can include:
· lack of up-front capital or suitable financing (see for example Sullivan & Johnson 2012, Johnson et al. 2013). Over half the participants in the REES scheme priority group reported they would have been unlikely to have obtained the appliances provided to them in the scheme, on a business as usual (BAU) basis (Pitt & Sherry 2013)
· lack of clear information (ACOSS 2013, Wilkins 2008)
· mistrust of savings estimates (Stieß & Dunkelberg 2013), or suppliers (Johnson et al. 2013)
· the landlord/tenant ‘split-incentive’ (see DSE 2009; ABS 2009 reported in ACOSS 2013)
· greater discounting of the benefits of energy efficiency (Hausman 1979).
What evidence is there of the performance of schemes for low-income households?
The need for energy efficiency support for low-income households doesn’t necessarily mean that the support should be provided with the VEET scheme.
To address whether the VEET scheme should have a specific provision for low-income household we point to the SA Retailer Energy Efficiency Scheme (REES)evaluation, the changes made to the UK ECO (Energy Company Obligation) and the Victorian experience.
The South Australian REES scheme improves results for those on a low income
South Australia’s REES is the only Australian retailer obligation with a ‘priority group’[2] target. Thus, the Pitt & Sherry (2013) evaluation of REES is particularly pertinent to the question of a low-income target for the VEET scheme.
Relevant findings include:
· Savings in the priority group were less likely to occur if not for the program (that is they have greater additionality) than those in the non-priority group. Only 18% of the priority group reported they were likely or very likely to have purchased the measures in the next 6 months without the scheme, compared to 36% of the non-priority group (p. viii).
· Savings were larger in lower income areas. Per household savings were stronger in areas with an average taxable income below $55,000 per year, and there was some tendency towards even larger savings in areas with incomes below $45,000 per year (p. ix).
· Although savings were smaller in the priority group (p.xi), the analysis did not appear to account for household size (see p.54). The priority group is likely to have a higher number of single or two-person households. As such while total savings are likely to be smaller the per capita savings may be larger.
· The energy audits carried out under the scheme did not on their own necessarily lead to savings or increased activities in low-income households.
Outcomes in the UK Energy Company Obligation (ECO) are mixed for low-income households
The UK ECO (which replaced the Carbon Emissions Reduction Target and Community Energy Saving Programme) is an obligation on energy companies like the VEET scheme. Unlike VEET, only households who are on a low income or living in ‘hard-to-treat’ homes are eligible to receive energy efficiency measures under the scheme. ECO also specifies the activities that can be undertaken.
Preston, Redgrove and Blacklaws (2014) reported outcomes including the following:
· The scheme achieved an increase in the number of measures in highly deprived homes and areas.
· Precise eligibility criteria and onerous reporting requirements have increased delivery costs, slowed down activity and hindered customer take-up.
· The program was skewed towards cheaper measures (hard-to-treat cavity wall insulation) and failed in its aim to support and develop a market for solid wall insulation.
VEET scheme performance for low-income households is mixed
In 2012, we investigated the distribution of energy savings from the VEET scheme (2009–11) across more advantaged and disadvantaged areas of Melbourne. We calculated the rate of VEECs created for the households that took up the scheme in different postcode areas as ranked by the ABS SEIFA Index of Relative Socioeconomic Advantage and Disadvantage. Results were reported by IRSAD quintile. There were mixed findings from the research (Sullivan & Johnson 2012):
1 Relatively disadvantaged areas received a greater share of the total VEECs than more advantaged areas.
2 Relatively disadvantaged areas received a high proportion of VEECs created through replacement light globes and showerheads.
3 Relatively advantaged areas received more of the high-value, high-return measures such as hot water services, space heating and insulation that generate markedly higher savings per household than the low-cost measures, but are likely to involve a householder financial co-contribution.
4 These results have important implications for the scheme in the future as the scope for low-cost items is exhausted. Low-income households are likely to receive less benefit from the scheme relative to other households if they are unable to afford the co-contributions required for more expensive measures.
Should the VEET scheme have a target for low-income households?
There are benefits of having a target for low-income households in VEET
The reasons we support a target for low-income households in VEET include:
· perception of equity: ensuring all household are able to transition to a low carbon future should be an important goal for government. Where an incentive program appears to (inadvertently) exclude a significant proportion of the population due to cost, a perception of inequity can develop
· increased or ‘real’ additionality: as the REES evaluation shows, a proportion of measures undertaken under these schemes would have occurred regardless of whether the scheme existed or not. The REES evaluation suggests, however, that the priority group are more likely to purchase measures under the scheme that they would not do without the scheme. This is exactly the type of energy saving that is most desirable
· certainty of ongoing assistance to low-income households: the VEET scheme has a degree of certainty that it will continue over the legislated period. This is a significant issue given that numerous energy efficiency schemes have been cut in recent years
· benefits of energy efficiency to low-income households: Benefits such as energy cost savings and health and wellbeing enhancement are relevant to a priority group for low-income households (see above)
· robust approach to measuring savings: the VEET scheme has a robust approach to measuring savings. Some other energy efficiency programs have been less robust in their measurement of savings
· low administrative costs: the VEET scheme has a low administrative cost, many other schemes run at a higher cost.
Nevertheless there are challenges in having a low-income priority in VEET
The unintended consequences of having a low-income priority group or target in VEET include:
· re-orienting the scheme away from its primary intent, which is finding the least cost abatement. Balanced against this is the argument regarding additionality of the measures in the priority group.
· potential small increase in administrative costs: obligated parties will incur some additional costs to identify, verify and record that households are in the eligible group. These costs are likely to be relatively small—the energy concession, for example, is one easy identifier.
· insufficient emission reduction opportunities will push up the costs of the scheme and reduce the benefits. This could in part be overcome by innovative financing and delivery approaches.
Which households would a VEET priority group target and how would they be identified?
People on low incomes including the so called ‘working poor’ should be targeted as they are vulnerable to energy-related hardship and are less likely to be able to afford energy efficiency upgrades themselves. People in energy retailers’ hardship programs should also be prioritised for assistance as energy efficiency may improve their ability to pay their energy bills.
Some of the people facing (or at risk of facing) energy-related hardship can be identified (see Table):
Table 1 Identifying people in energy-related hardship
Characteristic / IdentifierLow income / Commonwealth concession card holders (similar to Victorian energy concession)
Eligibility for Family Tax Benefit A
Struggling to pay their bills / Participant in energy retailers’ hardship program
Medical special needs / Medical cooling concession
However, further work is required to develop better ways to identify and target:
· other households struggling to pay their energy bills (but are not in an energy retailer’s hardship program)households who may be rationing their energy use or going without other necessities in order to afford energy
· households with medical special needs who do not receive the medical cooling concession.
Collaboration with not-for-profit community welfare organisations and financial counsellors may be one useful approach to developing a more nuanced targeting approach.
Recommendations
Primary recommendation
1 The Victorian government should either:
· introduce a priority group into the VEET scheme, which targets low-income and other vulnerable households, or
· introduce a new low-income energy efficiency program, which is linked to the VEET scheme. Funding for the scheme should be guaranteed for next phase of VEET (3 or 5 years).
Other recommendations
Outside the VEET scheme, the Victorian Government should:
1 Introduce additional financial incentives for low-income households to access higher value measures. These could include offering rebates targeted at measures which present a substantial capital barrier, such as hot water and heating.
2 Provide incentives for organisations to deliver affordable financing options for energy efficiency upgrades. These could include loans linked to council rates and low-interest loans.
3 Develop programs that involve landlords in the VEET scheme. These might include information for landlords and programs to assist tenants gaining consent from landlords.
4 Investigate the introduction of minimum energy efficiency standards for residential properties and mandatory disclosure of energy performance at sale or leasing.
References
Australian Bureau of Statistics (ABS) 2009 Household water, energy use and conservation, October 2009, ABS Canberra, viewed 14 May 2015, <http://www.abs.gov.au/ausstats/[email protected]/Products/4602.2~Oct+2009~Chapter~Insulation.
—— 2015, Household energy consumption survey, Australia: summary of results, 2012, ABS, Canberra, viewed 16 April 2015, <http://www.abs.gov.au/ausstats/[email protected]/Lookup/4670.0main+features100042012>.
Australian Council of Social Service (ACOSS) 2013, Energy efficiency and people on low incomes: Improving affordability, ACOSS, Strawberry Hills, NSW.
Azpitarte, F, Johnson, V & Sullivan, D 2015 (forthcoming), Fuel poverty, household income and energy spending: an empirical analysis for Australia using HILDA data, Brotherhood of StLaurence, Fitzroy, Vic.
Department of Sustainability and Environment (DSE) 2009, Housing condition/energy performance of rental properties in Victoria, DSE, Melbourne, viewed 18 May 2015, <http://www.climatechange.vic.gov.au/__data/assets/pdf_file/0004/81436/4418-DSE-Rental-Report-220909.pdf.
Essential Services Commission (ESC) 2014, Energy retailers comparative performance report: customer service 2013–14, ESC, Melbourne, <http://www.esc.vic.gov.au/getattachment/0fdace1d-e672-46bc-8b9b-b432340b2d34/Energy-retailers-comparative-performance-report-Cu.pdf>.