National Energy Savings Initiative Progress Report Chapter 9

9 Support for low-income households As indicated in earlier chapters, the Working Group’s terms of reference (Appendix A) require it to consider how a national Energy Savings Initiative could create incentives or requirements for activity to improve energy efficiency in low-income households. A particular focus of this further work will be to assess the costs and benefits that would flow from such an approach. In addition to the potential costs and benefits to low-income households, this analysis will consider potential impacts on broader sectors, as targeted support for this group could effectively provide a cross-subsidy to low-income households from all energy consumers covered by the scheme.

This chapter sets out how the Working Group intends to test approaches to this area of special focus through the regulatory impact analysis process.

9.1 Defining low-income households for the purpose of the regulatory impact analysis Low-income households are a very diverse group crossing many other demographic definitions, including renters, homeowners, pensioners, remote area households and non-English speakers. It is therefore extremely difficult, if not impossible, to accurately identify low-income households. AGL’s submission commented on the complexity of this in the energy sector:

... not all low-income households struggle to manage their energy bills. Rather, it comes down to the capacity of the household to meet its financial commitments, and research recently undertaken by AGL suggests that many young working families may be as likely to be struggling to make ends meet as those households in receipt of government assistance.

AGL submission

Given the complexities, the Working Group has not at this stage arrived at a suitable energy-specific definition of low-income households that could simply and practically be used to identify households that might be specifically targeted under a potential national Energy Savings Initiative. Stakeholders proposed a range of commonly used measures to determine which households could be considered eligible for support. Suggestions included:

. those in the bottom two income quintiles;

. those eligible for concession cards;

. those eligible for a low-income health care card; and/or

. those in receipt of maximum rate income support or Family Tax Benefit.

Page | 103 Each of these definitions has limitations. For example, definitions based on concession cards, health care cards and the receipt of maximum income support are considered likely to underestimate the number of low-income households because not everyone eligible for these benefits applies for, or receives them. Conversely, some households with a high income and high wealth include a person with a concession card. However, from a practical standpoint of operating a scheme, concession cards provide an easy way for participants to identify low-income households. As another example, the bottom income quintiles definition may overestimate the number of low-income households requiring assistance, because a significant number of households in these quintiles are home owners with low incomes but also low expenses (often with no mortgage), which significantly increases the proportion of their income that is expendable.98

A recommendation on what operational definition of low-income households is most appropriate would follow from a recommendation to specifically target this group, and is therefore not critical at this stage. However for the purposes of the regulatory impact analysis, in particular the modelling exercise, a generalised definition of low-income households which fits the characteristics of this heterogeneous group in terms of geographic distribution, energy consumption patterns and expendable income is needed. In order to closely align with the operation of a national scheme, any definition applied in the modelling should be one that could be practically implemented.

The possession of a health care card appears to be the most practical definition of a low-income household, noting there are some drawbacks with this approach as described above. Modelling of low-income households for the cost-benefit analysis will use Australian Bureau of Statistics (ABS) data showing the number and location of households where at least one person has a health care card.

Working Group view: definition of low-income households The regulatory impact analysis will test the costs and benefits of approaches to support for low-income households. This requires a generalised definition of low-income households which best fits the characteristics of this heterogeneous group in terms of energy consumption patterns and expendable income, and which can be implemented in practice.

The most practical method of identifying households likely to have a low income is to require the possession of a health care card by at least one member. Consequently ABS data showing the number and locations of residents with a health care card will be used in modelling.

9.2 Assessing if low-income households require explicit support When considering whether explicit support for low-income households is required within a potential national Energy Savings Initiative, it is helpful to take stock of the existing measures targeting energy efficiency in this group and any available information on the outcomes of these measures.

Page | 104 Existing measures A range of energy efficiency assistance is currently provided to low-income households through government, energy industry and third sector policies and programs. Some energy retailers offer hardship programs that provide home energy assessments and assistance to purchase energy-efficient appliances and equipment.99 Governments and the not-for-profit sector operate various rebate, concession, information, support schemes and/or basic energy efficiency measures including home audits and energy assessments.100 Some community sector organisations also provide support to assist low-income households improve household energy efficiency,101 some attracting credits from existing state schemes.

Under the Clean Energy Future plan, the Australian Government committed $130 million (in addition to household assistance payments through the tax and transfer system) to support low-income households to adjust to higher energy prices.102 This includes assistance through the Low Income Energy Efficiency Program, which will support trials of energy efficiency approaches in low-income households, and the Household Energy Saver Scheme, which will help low-income households manage their energy consumption.

Stakeholder submissions also referred to the broad range of special assistance currently targeted at low-income households, citing the achievements of some programs. For example, Mission Australia praised the New South Wales (NSW) Office of Environment & Heritage’s Home Power Saver Scheme, which has conducted 73,435 assessments and resulted in average savings of $265 per household each year, as of 31 December 2011.

Some submissions expressed a preference for continued support for low-income households via these existing mechanisms rather than including explicit support for low-income households in a potential national Energy Savings Initiative. Others noted that if a social policy outcome is primarily being sought, then a social policy intervention (rather than an energy efficiency mechanism) is appropriate.

Targeted policies could be better used to achieve the reasons for which a sub-target may be considered.

Energetics submission

There are ... more efficient and effective ways of addressing disadvantage where this exists. For example, if disadvantage is a concern then revising concession arrangements for energy would be a more efficient and effective way of addressing that disadvantage.

Simply Energy submission

Others stressed the importance of building on existing assistance programs when designing a scheme:

Page | 105 The design of the NESI should be informed by evidence of ‘what works’ from schemes the Federal Government is currently piloting such as the Low Income Energy Efficiency Program, Community Energy Efficiency Program and the Home Energy Saver Scheme.

Mission Australia submission

Low-income household participation in existing schemes

Low-income households in New South Wales, Victoria and South Australia are currently eligible to receive energy efficiency assistance under the existing state schemes. Available information on these existing schemes suggests that low-income households have been able to benefit from participation in existing state schemes, with or without targeted support.

The South Australian Residential Energy Efficiency Scheme (SA REES) explicitly targets low-income households by establishing a ‘priority group’ of households in which a person resides who receives one of a range of Commonwealth and State concessions or is actively participating in retailer hardship programs. 103 Thirty-five per cent of activity must be undertaken in priority group households. Across the first two years of the scheme, 2009 and 2010, uptake of compact-fluorescent lighting and water-efficient shower heads by the priority group exceeded the 35 per cent target. Upgrades to hot water heaters and ceiling insulation were also strongly represented across the priority and non-priority household group.104

The Brotherhood of St Laurence (BSL) has found that the Victorian Energy Efficiency Target (VEET), which has no priority group provisions, has supported substantial energy efficiency improvements in low-income households. In its submission, BSL details the results of an analysis of the VEET (in Melbourne only), highlighting that relatively disadvantaged areas have received a greater share of the total benefits (measured by Victorian Energy Efficiency Certificates (VEECs)) than more advantaged areas and a high proportion of replacement light globes and replacement high-efficiency showerheads, which were provided free of charge. However, BSL also found that low-income households have received fewer of the measures which cost more to install (often requiring a household co-payment) but have markedly higher energy efficiency returns and cost savings, such as hot water services, space heating and insulation.

Further, there is evidence in the SA REES of declining uptake in the priority group over time. More than 50 per cent of benefiting households were in the priority group in 2009 compared to less than 35 per cent in 2010. Retailers in South Australia have also reported difficulties in meeting the low-income household requirements in 2011, possibly caused by market saturation entering the sector.105

Page | 106 This pattern of low-income household participation in the SA REES and Victorian VEET implies that, where low-cost residential activities are included in a potential national Energy Savings Initiative, it may be possible to assist low-income households without establishing a priority group. However, it also implies that it could be more difficult to encourage low-income household participation should the opportunities for low-cost activities be reduced, especially if the remaining activities require a co-payment from the household. Furthermore, since some low cost activities (such as energy efficient lighting and low-flow showerheads) already have achieved a significant market share in some states, the potential to assist low-income households without establishing a priority group could be limited to those geographic areas where penetration remains low.

While there is no published evidence of a geographic bias towards activities being undertaken in particular areas under any of the existing state schemes, there is anecdotal evidence that activities only begin to occur in regional and rural areas as the metropolitan market dries up.106 Also, in the SA REES, just nine per cent of the energy audits that retailers are obligated to conduct were carried out in regional areas,107 though 18 per cent of the population live in regional areas.108

Approach to considering if low-income households require additional support through a national Energy Savings Initiative In light of the extent of existing assistance for low-income households to improve their energy efficiency, any decision to provide additional support through a potential national Energy Savings Initiative should be clearly justified. Two possible justifications that could apply include:

1. to provide for an equitable distribution of scheme benefits to low-income households; and

2. to shield low-income households against any adverse impacts that may result from the introduction of a national Energy Savings Initiative.

In considering these, three of the design principles discussed in Chapter 3 are most relevant, namely: equity, efficiency and simplicity.

. Equity: A potential national Energy Savings Initiative could result in public benefits in the form of less rapidly increasing energy prices, which would be shared by all energy consumers covered by the scheme. Equity questions arise regarding the private benefits that accrue only to households and businesses that improve their energy efficiency under the scheme. As a result, non-participants in the scheme would not benefit from the scheme to the same extent as participants.

. Efficiency: Including explicit support for low-income households could increase the cost of a scheme and these additional costs would flow through to all energy users (this also relates to equity).

Page | 107 . Simplicity: Including explicit support for low-income households could increase the complexity of scheme administration and compliance.

While justification 1 above would seek to ensure that the equity principle is satisfied, it is at odds with the other two principles as it is expected to reduce scheme efficiency and increase scheme complexity. On the other hand, while a scheme that did not provide targeted support for low-income households would satisfy the principles of efficiency and simplicity, it may not satisfy the equity principle.

Through the regulatory impact analysis, the Working Group will assess the need for targeted assistance and the cost of providing this support through the scheme.

Working Group view: targeted support for low-income households Through the regulatory impact analysis, the Working Group will assess whether targeted assistance through a national Energy Savings Initiative is justified, and the cost of providing this support.

The Working Group considers that, based on the experiences to date under the South Australian Residential Energy Efficiency Scheme and the Victorian Energy Efficiency Target, regional and remote low-income households may face different costs and benefits under a national scheme.

These issues will be considered further through the regulatory impact analysis.

9.3 Costs, benefits and options for providing support to low-income households Providing explicit support for low-income households within a national Energy Savings Initiative could increase the overall costs of the scheme, including through:

. reduced scope for the market to seek out the lowest-cost opportunities across all covered sectors to improve energy efficiency; and

. additional complexity for participants regarding administration and compliance.

Some submissions noted that any increase in scheme costs associated with supporting low-income households is likely to increase energy prices, which in turn would hit low-income households hardest.

... the added costs incurred by retailers in complying [with] the scheme will be distributed across all energy users and energy bills account for a greater proportion of an income in a low-income household.

Energy Retailers Association of Australia submission

Other submissions made reference to the cost of the SA REES compared to other existing state schemes. For example:

Page | 108 The result of splitting the total supply of energy efficiency credits into separate markets is reduced liquidity, and therefore higher costs. As these commodity prices fluctuate independently, liable entities are not able to restrict contracting options to those available at least cost.

Simply Energy submission

While increased cost is a legitimate concern, it is important to assess any costs against the benefits that could be delivered through a national scheme. The potential benefits of providing explicit support for low-income households within a national Energy Savings Initiative are likely to be broadly the same as those benefits sought through other policy mechanisms which aim to improve the energy efficiency of low-income households. These typically include helping with energy bills and increased amenity and health benefits.

It is also important to note that low-income households would share in any public benefits associated with a national scheme (even if they don’t participate), if the scheme successfully reduces future infrastructure costs and, therefore, energy prices.

Options for supporting low-income households There are two main design options for a national Energy Savings Initiative that could explicitly support low-income households:

. a ‘requirements-based’ scheme: set a sub-target that requires a certain amount of energy savings to be achieved in low-income households through regulation, similar to the SA REES and the United Kingdom’s Carbon Emissions Reduction Target; or

. an ‘incentive-based’ scheme: provide specific incentives to encourage savings in the low-income household sector. These could include a certificate ‘multiplier’ for activities carried out in low-income households, or crediting particular activities designed specifically for low-income households (for example a deemed savings methodology for a package of activities undertaken in low-income households);

Stakeholder submissions expressed varying views on these options:

A sub-target for low-income households will reduce the efficiency of the scheme, but the EEC does not object to the Government considering a sub-target for low-income households as one of the options for ensuring that low-income households secure an appropriate portion of the benefits of the ESI.

Energy Efficiency Council submission

Sub-targets are almost certain to increase scheme costs and it will be the low-income group that will end up worse off as energy bills form a larger proportion of their income.

Origin Energy submission

Page | 109 One risk [of a multiplier for low-income household activity] is that if both residential and industrial certificates are combined, then the price [of certificates] can be depressed by a large influx of smaller energy efficiency projects.

Sustainable Energy Association of Australia submission

Some submissions expressed a clear preference for a scheme that provided no explicit support to low-income households, with assistance to low-income households being provided via other mechanisms.

... a program for this group should be a standalone program, possibly administered by the social housing agencies. This can properly consider entitlements, means testing as appropriate and better define the problem to be solved.

CSR Limited submission

... the Clean Energy Council does not advocate for sub targets for low-income households but recommends linkages to support low-income household through separate programs administered by community and welfare organisations to educate and encourage the uptake of the energy efficiency activities included in the scheme.

Clean Energy Council submission

The use of a sub-target enables a high degree of certainty that the prescribed level of activity will take place in low-income households. This, in turn, leads to a relatively high level of confidence in the projected additional costs of including requirements in a scheme.

Alternatively, providing support for low-income households via incentives provides no certainty that the desired amount of activity will take place in low-income households. This, in turn, leads to a relatively low level of confidence in the projected additional costs of a including incentives in a scheme. In addition, incentives typically distort energy savings via a scheme and can lead to unforeseen difficulties in the certificate market, such as driving down the overall price of certificates, which can discourage investment in other activities eligible under a scheme.

Working Group view: requirements or incentives for low-income households If the regulatory impact analysis finds that a national Energy Savings Initiative could provide explicit support for low-income households in a cost-effective manner, the Working Group considers that requirements are preferable to incentives. This is because they provide greater certainty with regard to activities undertaken in low-income households and the additional costs of including explicit support for this group.

Nevertheless, the regulatory impact analysis may include consideration of the relative costs and benefits of incentives.

Page | 110 98 The Australian Bureau of Statistics (ABS) has adopted the practice of using persons in the second and third deciles, rather than the bottom two quintiles, of the income distribution when describing the characteristics of persons on low incomes. This is because there are significant numbers of households in the lowest quintile that have considerable wealth to support levels of consumption not possible on their incomes alone. When looking at ‘equivalised’ measures of disposable household income and net worth from 2009-10, a third of the population in the lowest income quintile were also in the top three wealth quintiles (Equivalised household income is total household income adjusted by the application of an equivalence scale to facilitate comparison of income levels between households of differing size and composition, reflecting the requirement of a larger household to have a higher level of income to achieve the same standard of living as a smaller household). Source: Australian Bureau of Statistics, viewed on 8 May 2011 http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/6523.0Explanatory%20Notes12009-10?OpenDocument and personal communication with Stephanie Cornes, Director, Household Economic Resource Surveys, Australian Bureau of Statistics, Canberra, 18 April 2012.

99 For example, see: AGL, Staying Connected Program, viewed on 8 November 2011, http://www.agl.com.au/home/billing-and- payments/Pages/Staying-Connected-Program.aspx ; and TRUenergy, Hardship Policy, viewed on 9 May 2012, http://www.truenergy.com.au/residential/youraccount/hardshippolicy.xhtml

100 Queensland Government, viewed on 9 May 2012, http://www.deedi.qld.gov.au/energy/rebates-and-concessions.htm; and New South Wales Government, Information for energy consumers: Energy rebates, viewed on 9 May 2012, http://www.trade.nsw.gov.au/energy/customers/rebates.

101 For example, see Kildonan Uniting Care’s program: Kildonan Uniting Care Energy Efficiency Audits, viewed on 9 May 2011, < http://www.kildonan.unitingcare.org.au/energy_services.php>; and the NSW Government’s No interest loans scheme program managed by Good Shepherd Youth & Family Service: NSW Government, No interest loans scheme program – NSW NILS® services, viewed on 8 November 2011, http://www.fairtrading.nsw.gov.au/About_us/Our_services/Grants/Nils_auspice_for_nsw_state_coordinator.html

102 Australian Government, Securing a Clean Energy Future – The Australian Government’s climate change plan, Canberra, July 2011, p 83.

103 Essential Services Commission of South Australia, Residential Energy Efficiency Scheme (REES) FAQs, Who are the priority group households? http://archive.escosa.sa.gov.au/site/page.cfm?u=298.

104 M Philipson, Low-income Aspects of REES, Presentation to National Energy Saving Initiative Low-income Household workshop Adelaide, November 2011.

108 Australian Bureau of Statistics, 1345.4 - SA Stats, June 2011, viewed on 9 May 2012, http://www.abs.gov.au/ausstats/[email protected]/Products/1345.4~Jun+2011~Main+Features~Demography?OpenDocument.