Energy poverty: short-term subsidizing or long-term investment?

At the same time, the Dutch government committed to their long-term strategy regarding energy pricing in their Climate Agreement (2019). The price of natural gas is slowly being increased, while the price of electricity would have to decrease. In this way, rising gas prices are used as an instrument to motivate households to start using less gas. Multiple measures can be taken in order to decrease a household’s demand for gas, such as insulating the home better, or installing a heat pump. The Netherlands wants to get rid of using natural gas completely before 2050.

So, the government wants to gradually increase gas prices through taxation, why do they now introduce a temporary reduction then? Actually, the market price of gas is currently rising too fast. Therefore, the current reduction of the energy tax is aimed at keeping energy affordable and preventing payment problems. The concept of ‘energy poverty’ is being mentioned more and more in the last months. That is because the most susceptible group consists of households with a relatively low income and a poorly insulated home. They are most harmed by a sharp rise in energy costs, because these costs will then take up an increasingly large share of their income. TNO recently estimated 550.000 households to live in ‘energy poverty’ in the Netherlands.

However, a generic reduction in the energy tax will not help this vulnerable group. If we compare a well-insulated home to a home without proper insulation, the energy needs can differ substantially. A household that has to take out a new energy contract now will pay about 140% more for gas than a year ago. For a well-insulated home, this would amount to an average of €170 in extra costs, but for a home without proper insulation, it would be as much as €750. The current reduction in the energy tax would ensure that each household would be compensated by approximately €400. Thus, some households will get more compensation than they need, while others are only covered for half of their loss. When we think about the fact that an above-average number of low-income households live in poorly insulated homes, the insufficient compensation becomes even more problematic.

Note: figure shows the development of the Dutch energy providers one-year fixed contracts in the period 2020-2021. The blue line indicates the average price of the top 5 energy providers, based on an average energy-usage (1.500 squared meter).

This is the perfect time for targeted measures for the group of households that is hit hardest. Not only are they now hit hard by the increase in gas prices, they will also be the ones that will be most vulnerable to the government’s future climate strategy. The households living in ‘energy poverty’ are likely to not have the means to invest in making the home more energy efficient. Compensation for the current high gas prices is appropriate for these households, but let’s look in particular at the unique possibility to combine the reduction of short-term costs with the future sustainability goals: subsidize the retrofitting of poorly insulated homes.

This will kill two birds with one stone: households will have a permanently lower energy bill and the demand for natural gas, which we so desperately want to get rid of, will decrease.

Out of the 550,000 households affected by ‘energy poverty’, only 12% are homeowners. The remaining households have a rental home, three-quarters of them owned by housing corporations. Housing corporations could finance home insulation with the money that they now save through the abolishment of the landlord charge (in Dutch: verhuurdersheffing).

The 66,000 homeowners living in ‘energy poverty’ are responsible themselves for improving the energy efficiency of their home. For them, we must focus on improving their homes quickly and effectively. Ideally, a home should be thoroughly improved, but given the limited resources, this is unrealistic. If we limit ourselves to insulation of cavity walls and crawl spaces, the gas bill can quickly be reduced by 25% to 30%. The costs are surprisingly low: research we have carried out shows that the above-mentioned insulation costs around €2,000 per single-family home once the existing subsidy has been deducted. For the 66,000 homes, the price tag would then be €132 million.

Practically, this would also be feasible. The technology is available, there is a range of reliable insulation companies, and the infrastructure for subsidies is in place. The subsidy amount should only be increased for households with a demonstrably low income.

Through spending on energy efficient retrofitting, rather than on reducing the price of fossil fuels, we can make structural steps in the energy transition. The proposed reduction in the energy tax is too limited, does not end up where it is most needed, and keeps up the current demand for fossil fuels. In this way, we stay dependent on foreign gas supply and keep households vulnerable to fluctuations in the price of gas. The government must focus on a sustainable solution to energy poverty: put the subsidies on energy in cavity walls.

Read the (Dutch) public engagement on this subject by these authors:

https://www.nrc.nl/nieuws/2021...

The calculations in this article take into account the market prices for energy of October 2021.