Sustainable Prosperity for Europe

The Energy Poverty Task Force


How to make energy efficiency work for vulnerable consumers? - Second Workshop Report

19 May 2016


Framing the context

The discussion was introduced by the findings of the Insight_E Policy Report on “Energy poverty and vulnerable consumers in the energy sector across the EU: analysis of policies and measures”, with particular reference to energy efficiency programmes. The following findings were mentioned and discussed:

Differentiated approaches among member states. The report found a large degree of disparity between member states as for the definition and understanding of energy poverty, which translates into very different policy approaches and measures also when it comes to the design of energy efficiency measures dedicated to vulnerable consumers. Three quarters of member states have put in place energy efficiency measures, which largely differ in terms of essence, implementation, and targeting. 30% of all actions tackling energy poverty in Europe actually focus on energy efficiency programmes – out of which the large majority focuses on retrofitting interventions.

Some specific examples were reported. Belgium and Germany recur to savings programmes, where long-term unemployed are trained to offer energy saving consultation and install saving fittings to low income households. In the Netherlands and in Sweden rental fees include energy bills, in order to realign the interests of landlords and tenants and solve the split incentives problem. After a refitting intervention, a housing cost guarantee ensures that the total cost (rent and energy) does not increase. Originally applying to social housing only, such a scheme was recently extended to the private rental market. France uses energy checks, offering grants to tenants for thermal renovation works under conditions of income and performance. A large untapped potential lies in Southern and Eastern Europe, which are the most affected by energy poverty. Several Southern European countries are undergoing austerity policies that reverberate on the available support to energy efficiency measures. In Eastern Europe, the socialist legacy left apartment blocks with poor efficiency performance, exacerbated by district heating systems. It was therefore suggested that there would be an EU value added in channelling and streamlining member states’ actions in order to maximise the potential of national funding schemes, in coordination with the EU anti-poverty action.

Participants stressed that despite a significant work in terms of awareness raising by the European Parliament, and the general openness of the European institutions to consider energy poverty as a problem to address – and therefore to define, measure, and figure out the policy effects – most of the problems lie with an extremely differentiated approach to energy poverty by member states, many of which do not even recognise the problem, notably in Eastern Europe. However, other participants reported that the picture with Eastern Europe is less simple than it looks. Hungary introduced a scheme dedicated to banks and tenants with a guarantee on losses, which proved extremely successful with a 0% default rate. This is a transferable model, and similar initiatives were also adopted by Lithuania and Estonia.

The need for a holistic approach. It was argued that narrowing the view to energy efficiency only would not be the right approach. Member states should adopt holistic views fully factoring in social consideration, and this should be somehow reflected in the Energy Efficiency Directive’s revision. Also, it was stressed that energy poverty is a multi-faceted problem, which requires a broad approach to energy including not only electricity and gas, but also oil, coal, and renewables; and should involve a large number of stakeholders, as each of them addresses a piece of the puzzle while coordination is still insufficient.

Sectoral focus. Most measures aiming at increasing energy efficiency focus on building refurbishment. About 65% of them in Europe focus on retrofitting. Out of this portion, about 30% is targeted at vulnerable consumers, exposing an untapped potential as they address one of the structural causes of energy poverty – notably, energy and heating leakage in low quality buildings. Such a strong attention on the building envelope, however, neglects other important domains for action such as usage.

The need for better targeting. When not targeted, access to efficiency improvement is often denied to low income households. This largely depends on regulations which target mainly new buildings – notably, those where poor households do not live. Particular attention should be given to the private rental market, as social housing is normally prioritised by targeted energy efficiency measures. Tenants are the most disadvantaged due to split incentives.

Building a political narrative

It was underlined that although energy poverty is a mounting problem in Europe, the level of political attention for it is still poor. It is essential to build up a political narrative around energy poverty, focusing on the fact that even if investment requirements are huge, the cost of inaction would be higher as it would have a large number of health and social implications with high costs. For instance, there is an evident correlation between health problems and poor housing. Also, it is demonstrated that energy poverty can affect kids’ education. Considering these variables, it was estimated that in the UK ₤60 bn per year are lost due to poor housing.

Against this background, participants put the size of investment into perspective. It was underlined that the value of the building market in Europe is €1,200 bn. Out of such a figure, the investment needed for building renovation should amount to €60 to €100 bn investment on a yearly basis, which is a very small fraction when one considers yearly savings amounting to €150 bn per year. The current rate of renovation is 1% per year, whilst an investment in renovation would translate into a 8% per year growth for the renovation sector. As such, participants suggested that a political narrative should be developed around the fact that efficiency interventions to tackle energy poverty would also translate into growth and jobs. Positive spillovers can also go beyond, addressing the multiple downsides of import dependency, which costs the EU about €400 bn per year whilst 50% of the European consumption could be saved thanks to efficiency interventions according to estimations. All in all, co-benefits in terms of public finance would amount to €80 bn by 2030. However, these calculations[1] are conservative and do not take into account health benefits.

All these figures suggest that there is sufficient knowledge at the macro-level to provide for an interesting business case for large renovation interventions. The challenge is rather to convince the micro-level, and politicians have not been very effective in coping with this gap. Having in mind the bigger picture is essential to communicate why action is undertaken in this field. The Energy Union can only succeed if benefits are distributed across society. As such, participants agreed that a positive narrative should be developed. Strong connection between technical knowledge, social issues, energy market, economic gains, decarbonisation is needed. Everybody’s life would be positively impacted, with positive implications for the European project. Against this picture, the EU’s efficiency target is not sufficient. A higher 40% target could bring significant benefits for European societies and economies in terms of employment possibilities and reduction of energy poverty. 

Targeting

Political awareness should be also raised on the fact that most of the energy poverty problems concentrate in the private rental sector, and not in social housing – which is normally prioritised when it comes to energy efficiency interventions. Poor households in the private rental market spend about 40% of their disposable income on housing – including energy – spending less for their other basic needs and having less resources available to contribute to the economic life of their neighbourhoods and communities. As such, energy poverty deprives of further resources neighbourhoods which are already poor and in dire need of economic activity.

The private housing market is also where the problem of split incentives is concentrated. Tenants lack the resources to invest in energy efficiency measures and the legal capabilities required to access support programmes. In a majority of EU countries, renovation costs are passed onto tenants through rent increase.

Distributional issues related to energy efficiency policies were highlighted. There is a significant discretionality problem with Art.7 of the Energy Efficiency Directive, as member states are left free to choose what type of support policies to adopt to meet energy efficiency targets. This applies in general to a large set of support schemes intended for decarbonisation purposes. Very often efficiency obligations are paid by the consumers with no progressivity, as resources are raised through levies on bills. If the fixed part of the energy bill remains big, energy efficiency provisions have little impact on energy poverty. One should learn from the mistakes exposed by the subsidisation of solar panels. A carbon tax is certainly a much more progressive means, although further analysis is needed and taxation cannot be tackled at the EU level.

However, Art. 7also proved useful in some cases. It actually fostered successful partnerships between housing and energy providers with no costs for tenants.

Experiences and barriers

Data and definitions: There is consensus on the fact that vulnerable consumers do not always overlap with poor households, and therefore a dedicated approach is required for example in a form of a well designed grants regime. It was noticed that the most effective tool would be Art. 7 of the EED Directive – however, making it mandatory would require a definition. There is consensus on the main elements composing energy poverty: low income, bad quality of buildings, energy cost. Based on these three elements, it should be straightforward to identify where policy action should focus on. One should reduce consumption, reduce costs, and increase wealth. However, there is still a lack of  proper understanding of who is affected the most and where people in fuel poverty are located. Data are lacking particularly in the very lowest end of the income spectrum, which is where action should concentrate. Bringing together energy and social data is somehow a new challenge. Participants agreed that data collection is a very relevant dimension of the energy poverty problem. In their initiatives, large multinational corporations have difficulties in identifying who suffers most. One should therefore imagine how difficult it is for NGOs, which rely on much more limited financial means and face significant challenges in identifying an adequate business model. For instance, in Eastern Europe there is a big black market in the renting sector and an almost non-existing social housing sector, which makes knowledge very difficult.

However, other participants stressed the importance of focusing on common concepts rather than strict definitions, and streamlining all policies related to efficiency and support to income. Others noticed that as in the UK it took three years to reach consensus on a definition, to open such a discussion at the EU level is unlikely to bring results. If Bulgaria adopted the energy poverty definition of the UK, it would result that half of the Bulgarian population lives in energy poverty – with controversial effects on social expenditure.

Technical barriers: It was also reported that partnerships between credit agencies and local authorities seem not to work when it comes to cold homes (people who deliberately do not heat homes to save money), which is where the highest health costs concentrate. Several initiatives focus on pooling savings in order to create a common tool to access big public investments. Pooling consists in bringing together private and public money and work with regions and stakeholders to create joint clusters, so that NGOs can reach critical scale to access initiatives, including EU funding tools. While this approach is generally positive, its success is subject to its concrete implementation. Some cases have shown that initiatives bringing together local authorities and businesses had to confront restrictive interpretation of state aid rules by the managing authorities. As such, it was suggested that more attention should be devoted to technical barriers existing with the EU. This adds to the general problem of the complexity of the funding schemes, which discourages many poor households from applying.

Split incentives: Landlords’ reluctance to participate in support schemes for retrofitting was mentioned. Indeed, only recently some of the programmes were dedicated to landlords who rent, but more work needs to be done on the incentive structures. Even if landlords do not have to contribute financially, they are often afraid about losing money during the retrofitting works. Very often, there are prejudices about how long and burdensome renovation works are, raising reluctance from actors on the ground. However, there are examples of very fast renovation, taking place even in one day.  It was suggested that incentives should focus on persuading the landlords that their houses will actually live longer, with lesser need for future expensive interventions.

Missing focus: Participants also stressed that one of the major loopholes is a lack of focus on appliances, although they have a very large potential. Experience shows that in Germany households were able to save about 150 EUR per year thanks to the replacement of inefficient appliances. Participants mentioned ongoing activities on the sensibilisation of vulnerable consumers, carried out by companies and social housing operators, which gave return on investment amounting to 300 EUR per year per household. It was therefore suggested that the Directive’s revision should address such a loophole and adopt a long term perspective focusing on cutting down demand.

All in all, an element of consensus emerged on the fact that the EU can help in the fight against energy poverty especially when it comes to the removal of some of the specific barriers mentioned. If Art. 7 and 20 of the Efficiency Directive are the best candidates for focusing more on the poverty dimension, and also the internal market remains key for removing barriers.

The EU initiatives

The legislative initiatives. Two legislative packages are coming out with the potential of touching upon vulnerable consumers: The energy efficiency package, coming out after the summer, and the electricity market design initiative expected for the winter. In the context of these two legislative initiatives, the EU should ensure that markets do not prove harmful for the most vulnerable and that specific measures are designed to protect them.

Energy efficiency helps vulnerable consumers, although there are several caveats. First, a general question in need for an answer is: is energy poverty different from poverty, and does it need specific measures? Second, the energy poverty situation is affected by different social welfares, different ways to pay bills, different splitting among tenants and landlords across Europe. Thus, one should bear in mind that tackling energy poverty remains largely in the member states’ remit.

Currently, several provisions in the EU energy efficiency legislation exist that impact vulnerable consumers: Art. 7 of the Energy Efficiency Directive (EED) gives the possibility to member states to reserve budget for poor households in Energy Efficiency Obligation Schemes (EEOS). Ireland, France, Austria, and UK currently use such a possibility. Support to insulation works and boiler upgrades in low-income areas cover most of these initiatives, whilst it could be extended to others technologies such as smart metering. Also, a section of Art. 7 concerns metering and billing, aiming at giving information to consumers so that they can have a better deal. Art. 19 deals with split incentives. Eco-design also delivers effective solutions, although it does not always work at its best with vulnerable consumers as they tend to buy second hand products. Options for the revision of the energy efficiency package are under scrutiny at the moment, and the proposal is expected by the end of September. The Commission aims at setting up an EU building stock observatory, containing indicators on energy poverty. In this context, measures targeting vulnerable consumers specifically are open for consideration. However, it must be recognised that the Commission is not the only actor that can have an impact at the EU level. There is a lot that the European Parliament and the member states can do as well.

Funding. It was suggested to increase minimum efficiency standards by 2030, but removing member states’ discretionality on funding instruments, in order to ensure that funds are not based on regressive levies on bills. It is usually argued that times of financial crises are not the best moment to expand social expenditure, although there is strong case to make the opposite argument. But even assuming that austerity should be maintained, it should be considered that - whatever definition is adopted for vulnerable consumers, targeting interventions on energy poverty does not necessarily increase the burden on social policy as they fall already within some poverty definition.

Governance. There should be no contradiction in terms of centralisation or decentralisation. Solutions adapted to the local specificities are much cheaper and feasible than years ago. It is no longer the case that we need state-level solutions. This is especially true for vulnerable consumers living in rural areas, who require microfinance support at regional level. However, some level of centralised monitoring is needed. Unless we have reasonably targeted policies at national level, market solutions will not deliver alone.

Recommendations

Comprehensive approach needed to tackling the energy poverty challenge

Energy poverty is not just related to heating, electricity or gas, but covers also e.g. transport. Thus also energy efficiency regulation and measures should look at the bigger picture (different sectors, appliances etc.) in order to achieve the best results, and ensure that they support especially the most vulnerable consumers.

Sharing of knowledge and experiences:

  • Data collection on the effectiveness of policies and taken measures is weak. Gathering data, increasing knowledge and better sharing of information on the energy poverty challenge is a critical starting point to allow comparisons and monitoring of the impact of the policies. To this aim, the EU should host a centralised database, including a diversity of practices. It should form a knowledge base into different national experiences and support schemes. The database should also aim to gather data on the social benefits of energy efficiency with an attempt to monetise these benefits;
  • Whilst interventions for the benefit of low-income households most often concentrate on social housing – which is normally prioritised when it comes to refurbishment interventions -, the private rental market is the most exposed to the risk of energy poverty. Awareness raising, sharing of best practices, and incentives for energy efficiency measures  especially for the private rental sector are needed amidst the member states, in particular in the ones where social housing is not widely available such as in Eastern European countries.
  • Support to energy efficiency is not necessarily conducive to socially progressive outcomes; efficiency support schemes at the national level are often funded through levies on bills, implying a negative effect on vulnerable consumers. It is important to raise awareness on the negative social impact of funding efficiency support schemes through these levies.
  • Targeting is crucial. Measures supporting energy efficiency interventions are often unevenly distributed and discriminatory across sectors, countries and type of buildings. Two categories in particular are penalised: existing building stocks and tenants. Incentives and potential financing for investments and for self-generation are to be targeted at energy-poor citizens.

Funding:

  • As 20% of EU structural funds are already targeted to social purposes, the EU should raise awareness amidst member states about the potential to use this support for tackling also energy poverty via energy efficiency measures. Especially Eastern European member states should be encouraged to make use of the available funding for renovating low income households’ houses;
  • Misinterpretation of state aid rules by local authorities in the management of structural funds can weaken the funding of energy efficiency initiatives aimed at tackling energy poverty. More awareness is needed on the conditions for using the funds, in particular when it is combined with innovative financial instruments;
  • The funding provided by EIB and EFSI should complement the structural funds in ensuring that energy efficiency measures benefit also low-income households.
  • Any access to finance supporting efficiency measures should be based on a stable and long-term regulatory framework, which takes into consideration the whole set of objectives outlined by the Energy Union strategy.
  • To address the issue of split incentives between tenants and owners and help home owners who cannot afford the upfront costs, schemes should be encouraged whereby Distribution Systems Operators or energy suppliers pay the upfront investments and households gradually pay them back through the savings made on their energy bills.

Review of the Energy Efficiency Directive:

  • Art. 7 gives the possibility for member states to reserve funding for low-income households. It is at the moment left to the discretion of member states. This element should be removed when the costs are levied on bills. In order to become mandatory, a common concept or a definition of energy poverty is needed. This should be based on the general consensus of research and concentrate on its three main elements: income, quality of buildings, and energy costs. The application of the article should be prolonged to 2030 and could be extended to other technologies, i.e. smart meters;
  • Art. 9: progressive metering can have positive effects, but it is not automatically conducive to energy savings. Better and more uniform assessment of the cost effectiveness of installations is needed to create a more direct link between metering and savings. Overall, this should be part of a behavioural approach that should be especially targeted on vulnerable consumers through i.e. information and support;
  • Art. 20: access to EU funding for energy efficiency measures should be simplified through the establishment of fast track procedures and specific energy efficiency funds should be earmarked in EFSI. This would be consistent with the Energy Union’s emphasis on energy efficiency. Funds should be channelled through appropriate and qualified intermediaries in order to reach the right scale and target specifically vulnerable consumers.

Review of the Energy Performance of Buildings Directive:

Standards and binding targets for existing building stocks are needed.

Eco-design

While eco-design is highly efficient as an instrument in general, its benefits do not easily reach the more vulnerable consumers, who tend to go for cheaper or less-efficient second-hand appliances. Member states should be made aware of the challenge and share experiences on how the poorest can be given access to more energy-efficient products.



[1] Figures provided by participants based on Copenhagen Economics Study.

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