From Residential Energy Demand to Fuel Poverty: Income-induced Non-linearities in the Reactions of Households to Energy Price Fluctuations.

Author:Charlier, Dorothee
Position:Report
 
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  1. INTRODUCTION

    The residential sector accounted for 25.40% of energy consumption in Europe in 2014 (EUROSTAT, 2017). The energy demand of this sector is still growing steadily in line with society's increasing economic affluence. This trend is expected to continue in the near future (Meier et al., 2013). As a consequence, enhancing our understanding of the determinants of residential energy demand and characteristics of households is important for the field of economics as well as for policy analysis. Although the question of the determinants of energy demand in the residential sector has been abundantly analyzed (Meier and Rehdanz (2010), Cayla et al. (2010, 2011), Newell and Pizer (2008), Braun (2010), Rich and Salmon (2017)), studies of the overlap between those determinants and the characteristics of households, particularly their fuel poverty profiles, are--to date--few and far between. In fact, on the one hand, there is ample literature on the determinants of residential energy demand which identifies variables explaining energy consumption by focusing mainly on the role of prices and income (cf Section 2.1). On the other hand, the incipient literature on fuel poverty published over the last decade occupies an increasingly important space in the current energy landscape and focuses on the definition of fuel poverty, its measurement, and how to tackle it (cf Section 2.2). Nevertheless, to develop public policies with the double objective of enhancing energy efficiency and fighting fuel poverty in the residential sector, there is a crucial need to understand to what extent households respond to these policies and if there are any heterogeneities in households' responses according to their fuel poverty profile. This goal can not be reached unless the issue of the determinants of residential energy demand and fuel poverty are jointly analyzed. At the European level, each government defines, in line with European objectives, it own policies that are adapted to the specific national context to address the issues of residential energy efficiency and fuel poverty. However, learning (and even spillover) from these heterogeneous national policies can be very useful and goes in hand in hand with interlocked European objectives. In this context, one of the objectives of the EU Energy Poverty Observatory (EPOV) created in January 2018 is to "improve transparency by bringing together the disparate sources of data and knowledge that exist in varying degrees across the whole of the EU to promote informed decision making by local, national and EU-level decision makers." (1)

    In terms of national efforts, the French government has and continues to take action to improve energy efficiency in the residential sector and to combat fuel poverty. More precisely, when adopting the Energy Transition for Green Growth (ETGG) Act on 17 August 2015, the French government set ambitious medium- and long-term objectives for its national energy policy. This policy deals with all sectors of the economy and mainly seeks to enhance energy autonomy, decrease greenhouse gas emissions by, among others, enhancing energy efficiency, and provide the necessary tools to stakeholders to support green growth. (2) In a context of a steady increase in energy prices, and to ensure social acceptability and enhance the implementation of ETGG measures, the French government included a social component in the ETGG Act, calling for, among others, the prevention of fuel poverty, a situation under which some households have serious difficulties in meeting their energy needs (3).

    Currently, ONPE (2016) estimates the number of fuel-poor households at 3.8 million in France. With the expected large-scale diffusion of renewable energies and the associated carbon price increase from [euro]56 per tonne by 2020 to [euro]100 by 2023 driven by the ETGG Act, the cost of energy will plausibly increase and the conditions of access to energy will change. Therefore, some groups of the population are expected to find it difficult, or even impossible, to satisfy their energy needs, thereby exacerbating fuel poverty in both the residential and transport sectors. In this context, the government aims to ensure that the implementation of the targets of the ETGG Act will not increase the number of people suffering from fuel poverty. Hence, in addition to the several short- and long-term measures devoted to eliminating fuel poverty since the beginning of the 1980s (Dubois, 2012), the government continues to address the issue throughout the implementation of ETGG measures. In particular, regarding fuel poverty in the residential sector, curative measures have been implemented to help fuel-poor households to pay their energy bills, i.e. income support through an Energy Voucher (as of January 2018), affordable fuel pricing, and assistance with solvency in the event of arrears. French authorities have also implemented preventive policies that focus on the improvement of dwelling energy efficiency, i.e. dwelling insulation, double glazing, etc.

    The recognition of these measures as tools to fight fuel poverty has usually been accompanied by debates on their efficiency. For example, curative measures such as social tariffs for electricity are usually particularly criticized for their lack of clarity from the perspective of the fuel-poor population as well as their lack of indexation on energy price fluctuations. Moreover, although recent in France, dwelling renovation measures are advocated to represent a more promising strategy to resolve the fuel poverty problem in more durable manner than curative measures.

    Here, we argue that--regardless of the type of measure--the implementation of suitable public policies devoted to fighting fuel poverty in the residential sector requires an in-depth understanding of the determinants of residential energy consumption, particularly in the case of fuel-poor households, which are the primary target of the social component of the ETGG Act. No policy measure can be efficient unless households respond to it. Therefore, in this paper, by considering conventional determinants of residential energy demand, we focus on the non-linear effects of income on the reactions of households to energy price fluctuations. We give special attention to studying the sensitivity of fuel-poor households compared with that of non-fuel-poor households, as measured by the elasticity of heating energy prices. We integrate a new dimension in our analysis by considering the impact of income on the reaction of households to energy price variation, given other socio-economic and dwelling characteristics. Differences in the sensitivity of households, or alternatively, between the elasticities of energy prices, indeed depend on income level. By extension, we also look at implications of income-induced non-linearities in terms of the nature of the relationship between income poverty and fuel poverty: does income poverty necessarily translate into fuel poverty?

    We carried out our research within the theoretical frameworks of the well-established literature on residential energy consumption and the more recent body of literature on fuel poverty. Our empirical approach uses the panel threshold regression (PTR), which belongs to the class of regime-switching models and makes it possible to test for non-linearities.

    As far as we know, a study of income-induced non-linearities in terms of the distinction between people's reactions--in particular, on how fuel-poor households react to price fluctuations compared with non-fuel-poor households--has never been carried out before, although this issue is crucial for the implementation of policies that aim to eliminate fuel poverty and enhance energy efficiency in the residential sector. This fresh approach brings three new contributions to the field. Firstly, this study explores this distinction between fuel-poor and non-fuel-poor reactions to changes in energy prices. Secondly, we shed light through our empirical analysis on the issue of whether income poverty is different from fuel poverty or immediately translate into fuel poverty (Watson and Maitre, 2015). In particular, we assume in our empirical analysis that the problem of generalized poverty, as measured by the income level, is a determinant of fuel poverty and we look if effectively fuel-poor households determined under each PTR regime (elasticity) are income poor. Thirdly, this is the first panel empirical analysis on the fuel poverty issue. As far as we know, all previous empirical analyses dealing with fuel poverty have been conducted using a cross-section analysis, usually due to a lack of empirical data.

    The paper is structured as follows. In Section 2.2, we detail two brief reviews of the literature on residential energy demand and fuel poverty measures. In Section 3, we conduct an empirical analysis that focuses on the income-induced non-linearity of household reactions to energy prices to determine if fuel-poor households are more or less sensitive to energy price variations than non-fuel-poor households and if they are also income-poor. We start in Sub-section 3.1 by presenting the econometric framework and data. Then, in Sub-section 3.2, we present and discuss our results. Finally, in Section 4, we discuss the policy implications of our results and conclude.

  2. LITERATURE REVIEWS

    In this section, we present two brief literature reviews on the two conceptual frameworks within which our empirical analysis is constructed, namely the well-established residential energy consumption literature and the more recent fuel poverty literature. Therefore, in Sub-section 2.1, we present a summary of the literature on the determinants of residential energy consumption by focusing on the estimations of energy prices and income elasticities. Then, in Sub-section 2.2, we first define fuel poverty and give a quick summary of conventional indicators used to measure it. We will use some...

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