Reports 2016

Financial means to tackle energy poverty in Europe - Third Workshop Report

19 October 2016


Over the last decades, the share of European households’ income spent on energy products has been on the rise. Such a rise indicates that vulnerable consumers were disproportionately hit by growing energy prices. In 2000, European households spent on the average 5% on their income in energy product. In 2014, this proportion rose to 6%. As for the poorest households, the portion of income spent on energy products increased even more sharply as it rose from 6% to 9% over the same period. However, it should be considered that member states’ situations are extremely diverse, and such average figures do not capture the complexity of the problem on the ground.

In the Energy Union Communication of 2015, the European Commission stated that energy poverty should be tackled mainly through social policy means, and that mechanisms to protect vulnerable consumers in the phase out of regulated prices should be elaborated within the framework of the general welfare system. Futhermore, the Communication stipulates that If provided through the energy market, the best instruments should be social tariffs or discounts to be covered collectively by non-eligible consumers.

Existing financial interventions to cope with energy poverty

EU member states recur to two main types of financial instruments to cope with energy poverty: financial interventions to support low income consumers, and investment in energy efficiency of dwellings.

Financial support to low income consumers

As presented in the Insight_E Report „Energy poverty and vulnerable consumers in the energy sector across the EU: analysis of policies and measures”, out of measures aimed at the provision of financial support to different socio-economic groups in the EU, 36% consist in social support (i.e. social housing), 32% in energy cost subsidies or payments, 7% in subsidies or payments for the eldely, 20% in social tariffs, 5% in negotiated tariffs with utilities. Social welfare system represents the main channel for support and provider of parameters and indicators to identify recipients. Financial measures address mainly the cost of energy rather than the structural causes of energy poverty. This approach reflects a social-policy led orientation.

Some countries show a preference for social tariffs levied on energy bills. With such a scheme, a defined tariff is offered to vulnerable consumers. Italy adopts a mechanism called bonus sociale which takes the form of a discount in the bills for 12 months after request. The UK adopts a Warm Homes Discount (WHD) that provides an annual rebate of 140 pounds. In France, social tariffs consist in a 16% discount on the energy bill. This system will be replaced as of 2018 by energy vouchers. Vouchers can be used for any energy expense in the house or to cover a portion of thermal retrofitting works, for a variable amount depending on the level of income and the number of family members.

However, these measures raise some criticism especially as regards their targeting. Notably, protected consumers status is extended to a whole household if one member falls within one of the relevant social categories, regardless of the household’s cumulate income. In the French case, the automation of the scheme in 2012 led to doubling the coverage, taking eligibility to 3.3 millions households at the end of 2015. The new scheme is no longer automated.

Apart from dubious targeting, another criticism often addressed to social tariffs is that eligibility thresholds exclude those just above the threshold, who have at the same time to support the scheme, thus ending up to be the worst off.

All in all, the biggest challenge in achieving better targeting is related to the potential costs of data collection and increase of administrative burden, as current systems are based on general existing social welfare criteria and indicators.

Despite criticism, participants noticed that the energy poverty problem is characterised by a certain level of urgency – as such, even non-structural short term measures can make a substantial difference for many vulnerable consumers. In addition, one can note that despite good examples social policies across Europe have been quite slow to react to the increase in energy prices.

Support to energy efficiency policies

Energy efficiency is financially supported both at member state and EU level. Not all measures are targeted at vulnerable consumers, but as they tackle one of the structural reasons of energy poverty, they are expected to have a long-term positive impact on vulnerable consumers.

Out of all measures assessed by the abovementioned Insight_E Report, 42% consist in non-targeted grants, loans or tax incentives; 21% in targeted retrofit grants, loans and tax incentives; 8% in non-targeted appliances grants; 4% in targeted appliances grants; 8% in social housing efficiency improvements, and 6% in energy efficiency advice. A minor portion however consists in direct efficiency improvements in the private rental sector.

Member states adopt very diverse approaches in terms of measures, implementation, actors involved, and targeting.

France, the UK, the Netherlands and Denmark target these measures on vulnerable consumers. In particular, the Netherlands adopts a scheme specifically aimed at solving the split incentives problem.

Also in Eastern Europe, where the problem of energy poverty is very urgent and buildings are often supplied by district heating systems, some countries, like Hungary and Lithuania, have undertaken measures to retrofit multi-dwelling buildings. Although these measures are not targeted at vulnerable consumers, they have a positive impact by impacting all consumers.

It is in general reported that where the social protection spending is higher, levels of energy poverty levels are lower. Also, where  energy poverty is low, targeting becomes less important. To this extent, Scandinavians perform best, whilst the worst performance is registered in Central and Eastern Europe and in Southern Europe.

Funding initiatives

Participants identidfied several funding models applicable to initiatives on the ground. One of the schemes presented consists in investing in companies working on building renovation. Such a model is financed by the final value of the house in the moment of selling the stock.

Other initiatives aim at targeting behavioural aspects that can be tackled through social innovation These initiatives need small scale and agile actors. An experience of community building from the Flanders was brought to the attention. A rental model for appliances was developed in cooperation with manufacturers. Renting new appliances can be done at a cost lower than the cost of using old appliances. Targeted households for this initiative are identified through the social welfare system. This experience has the merit of demonstrating that vulnerable consumers are not necessarily reluctant to adopt technology, and savings on bills have for them a much larger impact than for non-vulnerable consumers.

Others mentioned the example of local or community-run energy cooperatives such as the Robin Hood Energy cooperative, owned by the Nottingham city council on not-for-profit basis. The company uses energy provided by the city’s facilities (i.e. waste-to-energy) in order to protect local consumers from the monopolistic position of the „big six”. In Plymouth, the city council offered a start-up loan and grant to help community members to formulate a business plan for a community energy group specifically aimed at solving the fuel poverty problem. However, and despite interesting projects in this field, it was stressed that a systemic approach to support social innovation would be welcome.

Specific attention was dedicated to the French energy reduction certificates aimed at reducing energy emissions. Income levels entitle to specific certificates, which cover in France 46% of the population. As a part of the National Plans mandated by the Energy Efficiency Directive 2012/27/EU, France introduced White Certificates. Under this programme, suppliers must meet government-mandated targets for energy savings. Suppliers are free to select the actions to meet their objectives, such as informing customers how to reduce energy consumption, running promotional programmes, providing incentives to customers and so on. Those exceeding and undercutting their objectives can trade energy savings certificates as required for common compliance. The distributional impact of such a measure is under evaluation, so it is not clear yet what the impact on energy poverty is. The UK adopts a similar scheme.

Recommendations:

Both short-term – such as financial support to consumers - and long-term interventions – such as investment in energy efficiency - are needed. Also, financial support is most effective when it is combined with energy efficiency measures.

In both cases, better targeting is needed. First, data collection is fundamental for targeting. Second, public schemes should target households, not housing or individuals.

A EU-wide strategy would be welcome in order to cope with the intermittent action by member states. Intermittency is often related to the project-based nature of initiatives requiring sustained support even after the end of the project cycle.

As outdated data and policy stagnation negatively affect vulnerable consumers first, it was suggested that the cost of energy should be revised annually.

A given percentage of energy efficiency funding should be earmarked for vulnerable consumers on mandatory basis.

EU financial instruments – EFSI and beyond

To fight against energy poverty, the EU is undergoing the following actions.

First, monitoring the level of protection through studies carried out by the Agency for the Cooperation of Energy Regulators (ACER) or by dedicated research consortia like Insight_E. Second, gathering evidence on the affordability of energy services. To this extent, a particularly relevant initiative will be the establishment of the EU Energy Poverty Observatory as of 2017. Third, providing funding for energy efficiency under a wide range of financial instruments. Fourth, revising the existing legislation in the framework of the Energy Union process. The winter package including the revision of the Energy Efficiency Directive, the Energy Performance of Buildings Directive, and the reform of the electricity market design will have an important dimension related to energy poverty.

The EU has a number of financial instruments at its disposal, although their impact on energy poverty is indirect.

The European Structural and Investment Funds support the shift towards a low-carbon economy promoting social inclusion, combating poverty and any discrimination. EUR 18 Bn coming from the Cohesion Fund and the Regional Development Fund for 2014-2020 dedicated to alleviate energy poverty will be in the area of energy efficiency, with EUR 5.4 Bn of investment already allocated, contributing to energy renovation for about one million households. EU funds can be used to attract private investment e.g. financial instruments in the form of loans, guarantees, equity.

In addition, the Cohesion Fund allocates resources for R&D (Horizon 2020) and capacity building. EUR 370 Million are allocated for the Support for the Urban Innovation Actions, and further financial instruments can be found in the European Energy Efficiency Fund and in private finance for energy efficiency.

Also, the enabling role of EU networks should be mentioned: among these, the Energy and Managing Authorities Network, the Smart Specialisation Platform on Energy, and the Fi-compass advisory services platform.

Finally, the European Fund for Strategic Investments (EFSI) can mobilise resources for large-scale projects of renovation of dwellings. Here, it would be relatively easy to channel the funding towards social housing, which normally relies upon large building stocks. The private rental sector, on the other hand, does usually suffer a scale too limited to mobilise this kind of interventions.

In any case, energy efficiency investments to reduce energy poverty are likely to require a grant component and strong public involvement. As such, a combination of ESI and EFSI might be required to unlock public interventions.

It also needs to be considered that funds are for local authorities to use, and in a wide number of cases resources are not spent and returned to the Commission. It was finally pointed out that the most useful role the EU can play is by hosting the collection of good practices. A document on good practices in energy efficiency will be issued as a part of the winter package.

Challenges for EU funding

Participants pointed out that several obstacles are present in tackling energy poverty with current EU funding instruments.

First, there is a lack of targeting. Funds are not earmarked for the fight against energy poverty.

Second, scale does not match the costs. Most of the initiatives cannot access EFSI support, as for such a little scale getting access is administratively burdensome.

Third, the bills of utilities are a missing dimension in EU instruments, and it is not clear how the EU could play a role in intervening with regulators.

Recommendations

EU level

The EU Energy Poverty Observatory should centralise the collection and accessibility of good practices.

Resources from i.e. Horizon 2020 should be allocated for research and studies on targeted policies, as significant knowledge gaps exist in this area.

The market design reform for retail and the New Deal for Consumers should encourage the simplification of invoices.

Strict regulation on public debt consolidation constitute a clear obstacle. Some sort of golden rule should be explored for interventions aimed at coping with energy poverty.

Ways should be found to push member states to allocate EFSI and other EU funding towards the alleviation of energy poverty. The earmarking of funds is key. The 20% earmarking of the European Social Fund for social inclusion could also be used to the purpose of fighting against energy poverty. Virtuous examples exist, for instance, in Nord-pas-de-Calais, where EFSI resources were used to combat fuel poverty, or in Andalucia, where the Sustainable Construction Programme helped improving energy efficiency in housing for 7,000 low-income families.

Technological neutrality acts as a principle that does not allow the upscale or large deployment of good technological solutions for lifting people out of poverty. The market does not give proper signals to cope with the EU objectives – as long as it does not, technological neutrality should be abandoned, i.e. by using eco-design.

National level

National action plans for energy poverty should be mandatory. These could focus especially on the support to multi-stakeholder platforms, and on targeting public investment, and elaborating way to solve the split incentive problem in the private rental market. Support the energy poverty platforms through official or semi-official bodies is fundamental. The multi-stakeholder experience of the Belgian platform offers a blueprint as it translated into a tangible result such as the Belgian barometer.

Funding measures through general taxation would be in general a fairer approach due to their progressivity, whilst the feed-in-tariff experience demonstrated that all non-eligible consumers would pay the same.

It is essential to involve TSOs and DSOs in measures concerning the mitigation of payment risk, in order to share a burden disproportionately falling on a limited number of actors.

Local level

The role of local energy agencies should be emphasised. EU supported local energy agencies all over Europe through structural funds. All the German states continue to have them as they proved to be an effective tool to support aggregation at local level and the ideal partner for local authorities in risk-sharing.

Regarding actions at city level, it was noticed that there is a disproportionate attention for buildings, and not enough for transport. Several cities are experimenting free public mobility.

More attention should also be dedicated to inequality in dwellings, as several interventions target vulnerable consumers with a geographic approach rather than targeted approach. However, there are dwellings where both vulnerable and non-vulnerable consumers live.

Energy poverty in the New Deal for Consumers

A third session focused on the New Deal for Consumers.

The European Parliament, with strong cross-party support, is recommending to the Commission to establishing an EU framework for vulnerable consumers, especially through the targeting of energy efficiency measures, improving market conditions and promote energy self-consumption. It was pointed out that this initiative should be coherent with the forthcoming elements of the winter package – in particular the revision of the Energy Efficiency Directive and the reform of the electricty market design.

The parliamentary work aims at allowing consumers to switch supplier without costs, based on the information provided by suppliers themselves – which should be required to notify customers when cheaper solutions exist. Such a proposal raised however the objection that by charging providers with the task of notifying better offers, the Parliament ignores the risk of creating an environment adverse to innovation. The concept is also at odds with the whole idea of proactive consumers.

It was also advocated that a common definition of energy poverty across Europe should be found, and that energy should be defined as a basic social right rather than a commodity. An appropriate framework should also be established in order to enable smart technologies with a positive impact on energy poverty alleviation. However, the idea of energy as a basic right was not endorsed by all participants. It was pointed out that such a concept would attribute to society a responsibility for energy use, which would somehow contradict the idea of proactive or responsible consumers. It was argued to this objection that a similar discourse can be made for basic rights such as health care.

The Parliament also calls for funding instruments to be allocated for long term solutions, especially in the enhancement of energy efficiency, rather than on short term relief. These should aim at reducing the risk of investment in efficiency. Despite the general support for this proposition, civil society organisations underlined that – especially in some part of Europe – the problem of energy poverty is urgent and should be dealt with now, notably by introducing – at EU level – a ban on cut-offs.

Finally, the Parliament did also recognise the importance of collecting the good practices.The Energy Poverty Observatory should be an important instrument to bridge current solutions rather than re-inventing them all the time, as it was stressed the importance to have independent sources of information that consumers can trust.

Conclusions

The workshop led to the following conclusions:

Energy poverty is a multi-faceted problem not limited to the building stock. Policies should extend their attention, in particular to transport and mobility.

Diversity of measures across the EU is due to a series of factors such as the hetoregeneity of energy preferences, rental markets structures, and prominence of energy poverty in the national discourse. Such heterogeneity justifies the need for a differentiated approach and highlights the difficulties to elaborate one-size-fits-all interventions at the EU level. It is likely that the main competences related to energy poverty will remain with the member states. However, there are significant opportunities at the EU level. Energy poverty-relevant legislative pieces such as the review of the Energy Efficiency Directive or the reform of the electricity market design are coming out, whilst there is a need to reflect upon the role of EU funding instruments. In particular, earmarking could be used to fight against energy poverty.

In designing policies, it is necessary to aim at integrated solutions, bringing together different bodies and instruments, and capturing the complexity of the problem. In fact, success in alleviating energy poverty depends on a set of complementary and mutually-reinforcing instruments.

Both long-term structural policies and short-term support to vulnerable consumers are needed. At the same time, energy efficiency policies should be better targeted at vulnerable consumers.

A strong need emerged for collecting data at the EU level and coming up with a EU-wide definition of energy poverty. Indicators should be elaborated on the basis of standardised data. Furthermore, increased research is needed on the effectiveness of different social interventions. It is not always clear what is the most effective, be it either social tariffs or vouchers. A better understaing of the target group is also needed as well as adjusting the intervention to them. In fact, lots of measures do not benefit the people most in need.

The governance framework matters. It is important to complete the internal market, but also to monitor the impact of price deregulation on vulnerable consumers. As the trickle down effest on the poor is not always evident. Furthermore, provisions regarding the prohibition of cut-offs should be further explored in the EU legislation.

Every action to tackle energy poverty must rely on the involvement of a wide range of stakeholders, notably energy providers, consumers (including the poor), civil society, and social entrepreneurs.

In order to positively involve the private sector, sufficient guarantees need to be in place. To do so, the European Investment Banks and pension funds can be mobilised, provided that projects offer adequate scale.