Energy poverty and deprivation in Ireland

Abstract

This report – funded by the Community Foundation for Ireland – explores the issue of energy poverty and deprivation in Ireland, once again to the forefront of the policy debate given recent increases in energy prices. Chapter 2 compares measures of self-reported energy deprivation and expenditure-based energy poverty. When discussing self-reported energy deprivation, we focus on households who report an explicit inability to keep their home adequately warm. We show that the incidence of expenditure-based energy poverty is generally greater than self-reported energy deprivation. We provide insight into some of the reasons for this difference; self-reported deprivation focuses more closely on heating-related deprivation, while expenditure-based definitions incorporate electricity expenditure, a proportion of which goes towards non-heating services. Electricity expenditure drives fuel poverty status for many households according to expenditure-based metrics, while much of the difference in expenditure and self-reported energy poverty statistics arises from expenditures on electricity. As electricity is used for many non-energy services, this is an important consideration when considering the policy response to heating-related energy deprivation. We also highlight important socio-economic differences between groups identified as vulnerable to rising fuel prices by expenditure-based measures of energy poverty and self-reported measures of energy deprivation. First, while there is a substantial overlap between measures of energy poverty and income poverty (i.e. the official at-risk-of-poverty line), there is less between measures of self-reported energy deprivation and income poverty. Second, while expenditure-based measures of energy poverty are highest for those living in detached dwellings and lowest for those living in apartments, the reverse is true for self-reported measures of energy deprivation. Similarly, while expenditure-based measures of energy poverty show little difference between homeowners and renters, self-reported measures of energy deprivation are much higher for renters than homeowners. There are two potential reasons for this. First, homeowners may spend more on electricity, driving the greater incidence of energy poverty among this cohort. Secondly, while homeowners and those living in detached dwellings spend a larger share of their income heating their homes, they also have a greater capacity to do so, likely reflecting their – on average – higher levels of income. By contrast, renters and those living in apartments are more likely to endure energy deprivation and go without heat because they cannot afford to heat their homes. Chapter 3 examines the impact of recent changes in energy prices on households and measures of energy poverty. We estimate that energy inflation experienced from January 2021 to April 2022 increased the cost of households’ consumption by €21.27 per week on average, rising to €38.63 per week when motor fuels are included. Should energy prices rise by a further 25 per cent, we estimate this would increase to an average of €36.57, excluding motor fuels, or €67.66 if they are included. While these increases are smaller in cash terms for lower-income households (reflecting their lower levels of expenditure on energy and motor fuel), they are much larger as a share of income. We estimate that recent increases in energy costs (including motor fuels) amount to 5.9 per cent of after-tax and transfer income for the lowest-income fifth of households compared to 3.1 percent for the highest income fifth. Similarly, we estimate that energy price increases are larger as a proportion of income for rural households, homeowners and those at risk of poverty. We estimate that recent energy inflation has increased expenditure-based measures of energy poverty to 29.4 per cent including electricity (from 13.2 per cent in 2015/16, the latest year of data available), and to 12.7 per cent excluding electricity (up from 5.1 per cent in 2015/16). A further 25 per cent rise in energy prices would increase the share of households classified as energy-poor (including electricity) to 43 per cent: almost double its previously recorded high of 23 per cent in 1994/95. Chapter 4 assesses options that policymakers might consider in trying to mitigate the impact of these rising energy prices on households. It shows that, while cuts to indirect taxes on energy do provide support to households particularly affected by energy inflation, such support is poorly targeted. For example, about half of the overall cost from cutting indirect taxes on energy is incurred by supporting the highest-income 40 per cent of households compared to less than a third from supporting the lowest-income 40 per cent. In addition, cuts to indirect taxes on energy blunt the incentive for households and the economy at large to reduce consumption of fossil fuels, while exacerbating existing distortions created by already reduced rates of VAT on gas and electricity: a large effective fossil-fuel subsidy. Lump-sum payments to households – such as the recent €200 household electricity credit – do not have such distortionary effects and are better targeted at the households most affected by rising energy prices than are indirect tax cuts. However, increases to welfare payments are more targeted still because they are means-tested. A Christmas Bonus-style double welfare payment would result in gains that are larger in both cash terms and as percentage of income for lower- than higher-income households, as well as those at risk of poverty. So too would a doubling of the Fuel Allowance, although this would be restricted to longer-term beneficiaries of welfare payments and exclude those recently unemployed. Increases to welfare payments provide little support to low-earning households without children, who are not entitled to any equivalent of the Working Families Payment. However, these households could be targeted for support by direct tax cuts if policymakers wanted to ensure that some support was provided to those outside the welfare system. While increases to income tax credits would primarily benefit higher- and upper-middle-income households (reflecting the relatively high level of income that can already be earned before income tax is paid), increasing the PRSI credit is more targeted at lower earners and renters. Our findings have important implications for policy. If the objective is to protect those most affected by rising energy prices, cutting indirect taxes is a poorly targeted response given that most of the revenue is spent compensating high- income households who have been least affected. Furthermore, trying to mitigate the impact of rising energy prices by cutting indirect taxes on fuel can have other undesirable effects, both in the short and longer run. In the short run, indirect tax cuts counteract the signal given by rising prices to reduce consumption, potentially exacerbating the risk of supply shortages and rationing. In the longer run, cutting taxes on energy weakens the incentive to invest in energy-saving technology and behaviour. In addition, cutting indirect taxes on energy exacerbates existing effective subsidies to burning fossil fuel, with, for example, reductions to VAT on electricity and home heating fuels further distorting consumption decisions towards such services and away from goods or services subject to the standard rate. Instead, increases to welfare payments, the fuel allowance, and even lump-sum payments (like the household electricity credit) are better targeted at those most affected by energy inflation. Prioritising targeted supports, as opposed to broad- based supports, also reduces the likelihood of fuelling further non-energy inflation and will become even more important the longer we experience high energy prices