Fuel poverty implications of carbon budgets to 2030

Modelling the impact of emission reduction targets on the fuel poor

Project duration: March 2014 to November 2014

The Government has committed to cutting UK carbon emissions, with four successive legally binding ‘carbon budgets’, covering five year periods from 2008 to 2027. The carbon budgets are set at levels recommended by the Committee on Climate Change (CCC). Meeting these budgets has implications for fuel poverty levels in the UK. The CCC therefore commissioned CSE to undertake research to explore the implications for fuel poverty to 2030 of meeting the fourth carbon budget and help develop its understanding of the characteristics of households currently in or at risk of fuel poverty.

Whilst the first carbon budget target (2008-2012) was met and the UK is on track to meet the second (2013-17), to achieve the fourth carbon budget, the UK will have to make a more substantial shift towards a low carbon economy. Together with a projected rise in fuel prices, this will affect fuel poverty levels and the affordability of warmth. Energy efficiency improvements to the UKs housing stock offer potential to address both issues, but there are key considerations around how upgrades are implemented, which are explored in this research.

A novel approach

The study uses a new tool, developed by CSE for the Department of Energy and Climate Change (DECC) to underpin its own domestic energy policy modelling. The application, the National Housing Model, uses national housing condition survey data to create a detailed representation of the UK housing stock and its occupants. It enables analysts to create policy scenarios and investigate the potential impacts on household energy demand (and associated fuel bills and emissions) over time.

The research uses the NHM to model the implications for fuel poverty levels to 2030, utilising the CCC’s own estimates of the mix of measures needed in the residential sector to deliver the emissions savings required for the fourth carbon budget. The NHM was used to simulate the deployment of these measures (in various ways) across the UK housing stock, in conjunction with applying fuel price projections to give a range of modelled estimates of fuel poverty levels in the UK in 2030. Overall 23 scenarios were modelled and analysed. This quantity was due to the variety of ways through which measures could be allocated to households and the costs recovered (e.g. passed on to consumers through energy bills or via general taxation).

Measuring fuel poverty

The definition of fuel poverty in England was changed in 2013 to include an income threshold. Under this new “low income, high cost” (LIHC) definition, a household is defined as fuel poor if it has both a low income and above average (required) fuel expenditure. Scotland, Wales and Northern Ireland continue to define fuel poverty as needing to spend more than 10 per cent of income on fuel to maintain adequate warmth in the home. This research was the first instance in which estimates for both the 10% and LIHC definitions of fuel poverty have been generated for the UK using one tool. The approach highlighted how different definitions impact the results of such analysis, and the challenges associated with this when designing policies for the whole nation.

Characteristics of fuel poor households in 2013

The research first presents some depth analysis of the results from modelling fuel poverty in the UK in 2013 using the NHM. This explores the characteristics of households identified by the model as being fuel poor in each country. A popular classification analysis technique (CHAID) was used to look at the relationship between several socio-demographic and physical property characteristics and the likelihood of being in fuel poverty, under both the 10% and LIHC definitions.

Under the 10% definition:

Northern Ireland is estimated to have the highest rate of fuel poverty of all the nations. The severity of fuel poverty experienced also appears worse in the devolved nations, with 16-17% of households in Wales and Northern Ireland estimated to need to spend more than 16% of income on maintaining adequate warmth in the home.

Summary table 1. Fuel poverty estimates for the UK under the 10% definition (2013)

 EnglandScotlandWalesNorthern IrelandUK
Count (millions)4.20.640.440.315.6
Percent of households19%27%35%44%21%

Source: NHM modelling results (CSE, 2014)

Aside from lower income and/or high energy (required) bills, characteristics of the fuel poor differ slightly across the UK nations, but recurring features include: retired owner-occupiers in off-gas and/or rural properties; retired under-occupiers; out-of-work younger single adults with very low income in rented purpose-built flats.

Under the LIHC definition (the anaylsis focuses on the results for England, the only nation to have adopted the LIHC definition):

The number of households in England estimated to be fuel poor under this definition appears substantially lower – by nearly 200% – than estimated levels of fuel poverty under the 10% definition. This is due to the nature of the definition and the methodology used in calculating it (i.e. a household must have both a lower than average income and higher than average required fuel expenditure).

Summary table 2. Fuel poverty estimates for the UK under the LIHC definition (2013)

 EnglandScotlandWalesNorthern IrelandUK
Count (millions)2.380.270.140.072.86
Percent of households11%11%11%10%11%
Mean fuel poverty gap£605£710£949£854£638
Aggregate fuel poverty gap (£m)£1,439£189£135£61£1,825

Source: NHM modelling results (CSE, 2014)

The types of households that appear fuel poor under the LIHC definition varies in contrast to the 10% definition. Under the 10% definition, households containing pensioners represent almost half of all fuel poor households;under the LIHC definition, the proportion of pensioner households is considerably less whilst households of single adults under 60 and those containing children represent a much larger percentage.

Energy policy implications for fuel poverty

This study modelled the impact of the CCC’s projections for fuel price rises and measures needed to meet the fourth carbon budget on fuel poverty levels in the UK to 2030. The results highlight the importance of targeting measures to ensure fuel poor household benefit and designing policy in such a way that low-income households are not unduly burdened by any costs passed through to energy bills.

Targeting the fuel poor

The physical nature of fuel poor households (e.g. solid walls and off-gas) highlights the need for schemes to move beyond lower cost measures (often as a single measure) and instead deliver packages of measures that will sufficiently raise household energy efficiency ratings. A minimum standard for energy efficiency could buffer low-income households from the impacts of future fuel prices.

Modelling undertaken for this study shows that even with ‘perfect targeting’ at fuel poor households of the CCC’s projections for energy efficiency and low carbon measures needed to meet the fourth carbon budget to 2030, some households remain fuel poor. This emphasises the need for other schemes related to income maximisation, such as benefits checks, to be implemented in parallel with a minimum energy efficiency target.

Funding energy efficiency measures

The modelling undertaken here also explored the implications of different approaches to recovering the cost of measures being simulated under the CCC’s fourth carbon budget scenario. Under any scenario in which the costs of measures are recovered through domestic energy bills, fuel poverty appears worse. Any new policy that results in a bill increase should first consider the implications (‘who benefits, who pays?’) and implement a ‘safeguard’ to ensure at risk groups are shielded from any impact that could exacerbate fuel poverty; or better still any scheme designed to address issues of affordable warmth and fuel poverty should not be paid for through energy bills.

Key groups of consumers identified as being particularly vulnerable to the impact of policy costs on bills under the current set of Government energy and climate change policies include: households with electric heating; people living in rural areas; people who are high energy users due to specific needs (e.g. long term ill/disabled).

Conclusion

The results from modelling the impact of CCC's projected mix of measures to meet the fourth carbon budget suggest that these improvements have potential to address fuel poverty, but only if there are policies and programmes in place to ensure the fuel poor benefit from measures, and that they are protected from paying for the implemented policies through energy bills. Conversely, ineffective targeting of proposed measures and cost recovery through energy bills have the potential to exacerbate fuel poverty further.

Detailed analysis, also undertaken as part of this study, of the characteristics of households estimated to be fuel poor in 2013 has contributed to a better understanding of who the fuel poor are. This is important information in terms of whom to target and the interventions and measures needed; it is important to consider this when designing fuel poverty alleviation programmes, both for Government and fuel poverty NGOs and campaigning organisations hoping to reach the most vulnerable people.

Photo: Tom Lin, Flickr, reproduced under a Creative Commons license

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