Sustainable Prosperity for Europe

Energy Poverty

What role for the EU? - First Workshop Report

26 January 2016


The reference budget

Two approaches are used to evaluate households’ need for energy consumption: 1) A specified approach, calculating the amounts needed to reach a given living standard; and 2) a survey data approach, calculating the portion of income that households spend on energy. Thus using reference budgets can help to give more nuanced picture of energy poverty, which is part of a broader picture, given that the affordability of energy depends on other costs.

A pilot project for developing a common methodology for reference budgets in Europe was launched by DG Employment, Social Affairs and Inclusion at the end of 2013 with three main objectives. The first is to establish a reference budgets network composed of key experts and representative stakeholders, at national and EU level, to share experience and expertise on reference budgets. The second and third objectives are to develop a theoretical framework and a common methodology for developing cross-nationally comparable reference budgets in the EU member states.

Reference budgets are priced baskets of goods and services that are needed to identify the minimum adequate level of consumption for households in given countries, regions or cities, in order to achieve a given standard of living. These budgets are usually developed for a limited number of model families taking account of the household composition and circumstances; individual needs and characteristics such as the situation as regards housing, health and individual competences; natural and institutional characteristics, especially the availability and accessibility of public goods and services. They are used for a variety of purposes, including: evaluating the adequacy of benefits, money and debt advice, poverty measurement, budget information, and credit scores.

The Belgian barometer

The barometer method is an estimation. It eliminates the five richest deciles of population. To calculate the number of households experiencing energy poverty, a threshold (the ratio between energy expenditure and income) is determined, beyond which the share of energy expenditure in disposable income is considered to be exaggerated in relation to that of the total population. To determine the number of households in measured energy poverty, all households in the five deciles of higher equivalised incomes were removed.

The barometer has the advantage of being usable and comparable, as the threshold is not fixed so that it can be country-specific. The barometer can also be used at nation-level, but not for testing means.

Discussion on definition and indicators

Participants shared the concern that a one size fits all approach would not work in Europe when it comes to energy poverty indicators. Beyond the political problems associated to the possibility of a “name and shame”, unacceptable for member states, it was acknowledged that countries cope with different challenges and they prefer to recur to national indicators. However, there is room to work on common definitions or concepts.

Also, it was stressed that indicators should start from the purpose, as this is critical to the definition of eligibility criteria.

It was made clear that any common indicator would require an agreement at the EU level, which, however, is likely to be politically unfeasible. Member states are sensitive to the idea of definition as none of them would like to be labelled as a culprit and be pushed to take social measures. However, it was also stressed that any initiative on this field is likely to have a judgmental impact on member states’ performance.

Some participant suggested to build up on the definition issued by the World Health Organisation. Others suggested to adopt a social right-based approach on the model of the Council of Europe, referring to cases when rights are violated or not. As for legal ground on “right to fuel” there is probably no clear binding EU or international law. However, jurisprudence draws a more complex landscape. Positive obligations exist that bind public bodies under EU law coming from various international courts.

Politically, the EU Commission intends to avoid being super-prescriptive. Even a common definition would hardly fly. However, working on a concept of definition would be helpful. The Commission looks into integrating the concept of energy poverty into forthcoming pieces of legislation instead of creating something new on that.

The fight against energy poverty will be a relevant dimension of the forthcoming review of the electricity market design, which will come out in November and whose consultative communication was launched back in 2015 – and the review of the energy efficiency directive and the building performance directive, expected to be launched in September.


Consumers at the core

It was suggested that the key should be to embrace decentralization in a system where renewables and the consumers lie at the core. This is what the whole concept of energy transition is about, which implies behavioural change. Demand and the consumers should become the very core of policies, whilst flexibility and efficiency should be the guiding principles.

Promoting energy efficiency while taking energy poverty into account

When it comes to energy efficiency initiatives in the fight against energy poverty, there is still too little harmonization. There is potential for larger scale projects, the question is how to translate this into smart policies.

The building performance directive has helped to promote energy efficiency in cities, however, the directive is not sufficient as it does not cover all building stock. It is important to address the private market and make sure that owners use funds not to stimulate gentrification. Also it should be noted that sometimes refurbishment is more expensive than building new housing stock.

Role for financial instruments and social innovation

Participants underlined that the policy focus should be put on using financial instruments and social innovation. The EU institutions are already promoting discussion on best practices, and it makes sense to take stock of virtuous examples, such as the local councils aggregating demand and making contracts with large firms, or zero interest loans as used already in towns such as Malaga or Antwerp.

Schneider Foundation and Ashoka have launched the initiative “Social innovation to tackle fuel poverty”, focusing efforts on the support of social innovation projects in six countries (Belgium, Czech Republic, Poland, Italy, France, and Great Britain). The supported actions by this initiative focus on synergies, targeting households, education, skills and development. As an example, leasing more energy efficient appliances to those that cannot afford to buy them, allows also poorer consumers to have access to new technologies. 

It was underlined that social innovation initiatives are unevenly distributed across the EU. The share of social entrepreneurship working on energy and the environment is very high and dynamic in the UK, but almost non-existent in Central and Eastern Europe.

From the description of social innovation experiences, agreement emerged on the fact that isolated initiatives risk having only a marginal impact. There is a need for a systemic change based on strong collaboration across sectors and with many different actors. Credit institutions, private actors, civil society associations, government agencies, academics, activists, and social enterprises need to be part of the solution, embrace behavioural changes, and work to set up a common agenda identifying shared goals. Regional clusters can also be useful in this respect.

The Nordic Social Impact Bond (SIB) was also mentioned as a positive example of a financial solution designed to address a particular social problem. The SIB takes different implementation forms but the basic idea is to involve three parties: a government body such as a municipality, a service provider organization that delivers the intervention, and private investors that take the initial investment and the financial risk. If the social outcome improves, the public body repays the investors plus a return for the financial risk. If the social outcomes are not achieved, the investors stand to lose their investment.

Also taking a cooperative approach has provided positive results. Ecopower is a Belgian cooperative for financing renewable energy projects. The aim of the cooperative is to collect funds for RE-projects from many members. Ideally, the decisions concerning these investments should involve as many of the shareholders as possible. Such an aggregative approach enhance community ownership of projects and could be extended to energy efficiency interventions in disadvantaged neighborhoods. Aggregation is also key for eligibility. Out of ten vulnerable consumers, six are not eligible for loans. Pooling should be the very focus of social innovation initiatives.

Technology and digitalization also have a role to play. When it comes to examples of demand pooling and aggregation, it would be interesting to explore the opportunities arising from collaborative digital platforms to empower communities. Aggregation is essential as there are many examples where small projects proliferate, but such a fragmentation ends up compromising meaningful access to funding.

Practices to be promoted need to focus on the issue of split incentives. Tenants should not alone pay for an investment that improves their living, but also increases the value of the property, thus profiting owners. On the other hand, owners do not want to renovate stocks if they need to bear upfront costs to the immediate benefit of tenants. Positive initiatives exist that align the incentives for all involved stakeholders. To reach this aim, it is of paramount importance to build up trust and identify common interests.


Completing the internal energy market

Some participants reminded that taking a holistic approach to tackling energy poverty continues to require efforts in completing the internal market for gas and electricity. The objective must be to use the market to help reduce cost of energy services and empower the consumer. When discussing about tackling energy poverty, it is contradictory many member states continue to oppose competition and collaboration across borders – taking interconnectors as an example – which would give consumers access to cheaper energy. Also more transparency on pricing is needed: in many member states a significant share of the electricity and gas price is made of taxes, levies and network costs. It is in the interests of the EU and member states to remove the barriers to internal market, increase competition, reduce market concentration, limit price regulation and empower consumers by making pricing transparent and enabling them to switch operators.

Measures are also needed to address the distortions generated by inefficient energy subsidies. When it comes to national support schemes to renewable generation, many subsidies are spent inefficiently and the final cost is borne by everyone – which means it is disproportionally borne by the weakest segments of the society. The risk that the climate agenda, if not properly designed, could end up becoming socially regressive was repeatedly highlighted in several interventions.

Empowering consumers

Several participants highlighted what should be considered to be an “incomplete job” with reference to the present legislation, pointing out that there are several cases in which a lack of transposition of EU norms into national practice is contributing to exacerbating energy poverty.

For instance, the Third Energy Package makes explicit reference to the establishment of the energy ombudsman, an institution that could help vulnerable consumers to understand the market and to know their rights. It could play a role in addressing some of the main problems confronted by vulnerable consumers: clarity of bills, disconnection procedures, and explanatory duties of regulated DSOs.

Such a persistent lack of transposition led some participants to advocate more ownership of the market design by the side of the EU. At the micro level, a role for the EU was envisaged as a data collector on households’ consumption and to monitor barriers to switching, as a key element of competition.

Other participants insisted that correct implementation of consumers’ protection provisions aimed at tackling information asymmetries would be an effective way for the EU to have an impact, as the energy market is one of those where these asymmetries emerge more strikingly.

In addition, it was advocated that the EU could play a bigger role in promoting an energy consumers’ code, that would define minimum standards for price comparison and switching operators, promote transparency on pricing, and a unified communication of bills.

Promoting access to energy

It was also pointed out that the EU legislation explicitly mentions the access to energy. Unfortunately, this seems to have little impact. The role of regulators in particular was called into question, as their attention to the transposition of competition rules is not matched by sufficient parallel commitment to ensure reliability and affordability.

However, a large number of participants insisted that a light touch approach focusing on the traditional EU’s role in tackling barriers to competition will not solve alone the problem of energy poverty. Despite the waves of market liberalization, and taking stock of its shortcomings, they believe that further intervention is needed to tackle energy poverty.

As heating disconnection remains one of the most urgent challenges, a parliamentary report on meeting anti-poverty targets in light of increasing housing costs is being drafted and is likely to call on the member states to sign up to a European winter heating disconnection moratorium so as to ensure that during a defined winter period no household can be cut off from energy or that those who are must be reconnected to energy needed for heating that meets World Health Organisation (WHO) standards for adequate housing temperature.

Review of the Energy Efficiency Directive and the Electricity Market Design

All in all, with reference to the Energy Union agenda, both the review of the Energy Efficiency Directive and the Electricity Market Design were mentioned as important occasions for the EU to go beyond the role of competition and markets watchdog, and become element of a transformative dynamics.

Key elements to address will be the organization of funding for energy efficiency initiatives and aggregative interventions of the electricity markets in terms of renewable support and demand side response. A significant difficulty highlighted by participants is related to the proper use of EU structural funds for these initiatives. Beyond new resources that might be eventually poured in, the present difficulties confronted by all stakeholders in using available funds were underlined. Opportunities to tackle this problem might arise from forms of aggregations such as regional clusters.

Lastly, based on the observation that some member states (such as the UK) seem to offer better conditions for social entrepreneurship and innovation in this area, it would be important to compare framework conditions among countries. When relevant, the EU could push member states to improve the framework conditions in countries where they act as a barrier to social entrepreneurship and innovation.

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