Analysis of Government Expenditure on Alleviating Fuel Poverty in Ireland

1. Analysis of Government Expenditure on Alleviating Fuel Poverty in Ireland Jim Scheer March, 2013

2. The issueThe current policyAn alternative solution

3. The issue

4. Fuel poverty in Ireland • Excess winter mortality estimated at between 1,500 and 2,000 deaths per annum (one of highest in EU) • In 2011 over €465 million in energy subsidies paid to over 600,000 households • These costs will increase … • High unemployment • Likely future energy price rises • Existing poor quality (inefficient) dwelling stock

5. Fuel poverty determinants Energy Prices Household Income Dwelling efficiency Fuel Subsidies Programmes / incentives to improve efficiency

6. The current policy

7. 1. Subsidies €465 million p/a Over 600,000 households 2. Retrofit €20 million p/s 10,000 homes p/a Shallow retrofit Policy and expenditure

8. Policy questions • How to curb escalating subsidy costs? • Without adversely impacting the worst effected • Delivering a more permanent solution • Why change? • Subsidy bill increasing … • Benefits of subsidies are transient • Benefits of retrofit are long lasting • Moving towards energy poverty proofing the housing stock…

9. An alternative solution

10. Concept • To re-distribute the existing subsidies towards those most in need • Least efficient dwellings • Lowest income • Target DEEP UPGRADE program at those most in need i.e. low income combined with poor dwelling energy efficiency Maximise the alleviation potential of current government spending on energy poverty

11. Method – Reallocation (Energy Efficiency) Average existing subsidy per dwelling determined Energy spend estimated for a typical dwelling at each level of the BER scale Subsidies re-allocated on basis of BER to cover proportionate amount of bill at each BER level. Subsidies further reallocated on basis of income .

12. Method – Reallocation (Income) • Average subsidy per home before reallocation approx. €690 p/a • Distribution of income of households in receipt of NFS allowances (from Household Budget Survey), applied to the assumed BER distribution €1,280 €135

13. Results – Reallocation • Expenditure method - % income spent on household energy (primary uses), BEFORE reallocation SEP >15% ExEP >20% EP >10%

14. Results - Reallocation • Both EXTENT and SEVERITY (for the worst off) of energy poverty improved • Expenditure method - % income spent on household energy (primary uses), AFTER reallocation Better off Worse off

15. Results – Reallocation • € difference per week winter period (26 weeks) Better off Worse off

16. Results – Reallocation Over 11.5% (27,054) of households are removed from ENERGY POVERTY Reallocation alone reduces EXTENT and SEVERITY of fuel poverty Over 38% (20,528) in SEVERE ENERGY POVERTY are moved to a lesser category or out of fuel poverty Over 35% (33,321) of those in EXTREME ENERGY POVERTY are moved to lesser categories

17. Cost Benefit Analysis • Existing flat rate subsidy vs. reallocated subsidy • In context of dwelling upgrade program (deep retrofit e.g. all homes up to C3 or beyond) • Current DPER CBA guidelines • Societal and exchequer perspective

18. Scenarios

19. Costs and benefits included *Fuel subsidies are a transfer (both cost and benefit)

20. €20m p/a on EE Unlimited EE spend Every € invested returns €2 to €3 to society No matter what is spent on upgrades – there is a net societal return Re-allocation leads to subsidy savings CBA results Subsidy reductions Reallocated scenarios only Saving to exchequer Reinvest in more activity? Reduced mortality and morbidity Mortality -VSL Reduced costs associated with sickness / illness Emissions CO2 and other emissions EU carbon price and EU BeTa Methodex Energy savings 2% p/a price increase Comfort gains Willingness-to-pay Costs of upgrades Costs of BER (reallocation scenarios) Admin

21. Sensitivity analysis NPV remains positive with… • A discount rate of 10% (IRR = 13% to 21%) • Zero energy price growth assumption (constant 2010 energy prices) • NPV increases significantly if (real) prices grow faster than the historic rates used for the central case results. • If all health benefits are excluded • Increasing depth of retrofit… tested to as far as B3 in the reallocated scenarios

22. Benefits not included • Mental health benefits (Liddell & Morris, 2010) • Increased asset values associated with dwelling upgrades and decreased forced mobility (Drakos, et al., 2011) • Less time off work or school (Chapman et al, 2009) • Potential employment gains (Covec, 2011; Urge-Vorsatz & Herrero, 2011) • 20 jobs supported for every €1 million spent on upgrades • 3,200 for the high level upgrade scenarios

23. Exchequer perspective Reallocation unlocks … Incentive to go deeper Larger subsidy savings and societal benefits • Subsidy savings of €2.9 billion • (average of €83m p/a) ‘Stronger’ reallocation schemes could increase savings / investment in upgrades

24. REALLOCATION alone REDUCES EXTENT and SEVERITY of fuel poverty Conclusions The NET BENEFITS to society of tackling fuel poverty are VERY SUBSTANTIAL These are enhanced by the REALLOCATION of subsidies TO THOSE MOST IN NEED SIGNIFICANT co-benefits, including potential for significant EMPLOYMENT SUPPORT • Next steps … • Political acceptability • Landlord / tenant (incentives) • More health data …

25. Positives?Negatives?Further work?