assesment report on fuel poverty

Draft

"Improving Energy Efficiency in Low-Income Households and Communities in

Romania"

Fuel Poverty

Draft assessment report

December 2012

Ian Househam

Virgil Musatescu

CONTENTS

1. Introduction .............................................................................................................................. 1

1.1. Background ...................................................................................................................... 1

1.2. Romanian Context ............................................................................................................ 2

2. Current Legislative and Policy Framework ............................................................................... 4

2.1. EU Legislation................................................................................................................... 4

2.2. Other EU Policy Documents ............................................................................................. 8

2.3. Romanian Legislation ..................................................................................................... 10

3. Possible policy measures for Romania .................................................................................. 12

3.1. Defining fuel poverty ....................................................................................................... 13

3.2. Energy efficiency obligations and white certificates ......................................................... 21

3.3. Binomial tariffs ................................................................................................................ 32

3.4. Grants and loan schemes ............................................................................................... 34

3.5. Other measures .............................................................................................................. 42

4. Summary Of Recommendations ............................................................................................ 43

4.1. Definition of fuel poverty ................................................................................................. 43

4.2. Energy efficiency obligation / white certificate scheme .................................................... 43

4.3. Binomial tariff .................................................................................................................. 43

4.4. Grants and soft loan schemes ........................................................................................ 44

Annex 1 – Warm Front (United Kingdom – England) ..................................................................... 45

Annex 2 – KfW Energy Efficient Rehabilitation Programme (GERMANY) ..................................... 47

Annex 3 - Modernisation of Multi-Apartment Blocks under JESSICA (Lithuania) ........................... 49

Annex 4 –Green Deal / Energy Company Obligation (United Kingdom) ........................................ 52

Annex 5 – Modelling of alternative financing arrangements .......................................................... 55

References ................................................................................................................................... 67

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1. INTRODUCTION

1.1. Background

This report has been produced under the UNDP / GEF project “Improving Energy Efficiency in

Low-Income Households and Communities in Romania”. The report is the final deliverable for an

assignment conducted primarily in support of the following Activities outlined in the Project

Document1:

Activity 1.1.2: Development and adoption of policy recommendations and an action plan for integrating EE issues and fuel poverty issues into the practice of public administration at the national level

Activity 1.2.1: Integration of EE policy making and addressing of fuel poverty into the existing development plans or into a new energy plan of selected counties as pilots - including the implementation and monitoring of the plan

Activity 4.1.1: Development and approval for use at the national level of a methodology for fuel poverty assessment

The context for the assignment is set out in full in the Project Document, from which the following

key points are relevant:

Supply side subsidies for heat are scheduled to be phased out and replaced by demand side subsidies. Existing demand side subsidies already provide heat aid to low income households with a monthly income below 425 Lei, on a stepped scale that pays up to 90% of the heating bill for those households with an income below 155 Lei monthly

One of the key objectives of the project is to facilitate a transition away from subsidies for fuel consumption, towards support for energy efficiency measures.

Several programmes are already in existence for supporting the energy efficient retrofit of residential buildings. Three of these have been identified in the Project Document as being the most significant for this project to build on: the National Programme for Thermal Rehabilitation of Blocks of Flats; the National Program for Improving Energy Efficiency and Use of Renewable Energy Resources in the Public Sector; the programme of state guarantee for credits made by population for thermal rehabilitation of their homes.

There is a need to devise new support schemes that increase the effectiveness with which the limited amount of state support is used, so maximising the number of retrofits that can be supported.

This report builds on two intermediate reports produced earlier in the project: the ‘Preliminary

Assessment Report’ produced by the Fuel Poverty Expert, and the ‘Recommendations to the Inter-

Operational Working Group for Reducing Fuel Poverty in Romania’ produced by the National

Energy Efficiency Expert. The report also incorporates the main views and concerns expressed by

stakeholders attending the UNDP ‘Fuel Poverty National Roundtable’ held in December 2012.

The main purpose of the report is to explore the possible measures that Romania could implement

to reduce the incidence of fuel poverty among vulnerable populations. However, there is a current

imperative to transpose the EU Energy Efficiency Directive into Romanian law, so measures to

reduce fuel poverty need to be considered in this context. In particular, the Directive requires

Member States to formulate a strategy to promote investment in deep renovation in buildings

(Article 4) and to set up energy efficiency obligation schemes – or alternative schemes with

equivalent efficacy (Article 7). Given that fuel poverty is intimately linked with the poor thermal

performance of buildings, transposition of the Energy Efficiency Directive would appear to offer

good opportunities for addressing fuel poverty. This report therefore examines the potential role in

1 UNDP (2011)

2

tackling fuel poverty that could be played either by energy efficiency obligation schemes or by the

alternative measures outlined in the Directive.

Terminology – Energy Poverty versus Fuel Poverty

The two terms 'energy poverty' and 'fuel poverty' are sometimes used interchangeably, but this paper follows the more common convention of differentiating between the two conditions. Energy poverty is the term commonly used in the development community to refer to poverty that is exacerbated by a lack of access to modern energy sources and end-use technologies (particularly cooking fuels and electricity), and is most prevalent in less developed regions of the world. Fuel poverty is the term coined in the UK in the 1980s that refers to a problem of affordability rather than access, which is present in some of the world's most developed countries. In this developed-world context, it usually refers specifically to energy used for space heating and is linked to dwellings with poor thermal performance. Unfortunately, many European Union documents have adopted the term 'energy poverty' to refer to this condition and, although the Commission Staff Working Paper “An Energy Policy for Consumers” points out that the two terms are not interchangeable, it does little to clarify the distinction. This report uses the term 'fuel poverty' to refer to the affordability issue – a lack of what is often called 'affordable warmth' – using the term 'energy poverty' only when quoting directly from EU sources.

1.2. Romanian Context

A large proportion of Romania’s population is not able – in general and in normal conditions – to

provide itself with sufficient levels of thermal comfort in the home, because of the high cost of

heating energy relative to their income. While the energy efficiency measures needed to alleviate

this situation are well known and technically feasible, there are a number of financial, legislative

and regulatory barriers to their implementation. The urgency of this problem is heightened at

present because of energy market liberalization in Romania, and the recent cancellation of state

subsidies for heat energy.

Romania’s energy sector is currently passing through a phase of transition, with two important

pieces of legislation having been adopted at the Romanian and the EU level: the new Electricity

and Gas Law in Romania and a new Directive on Energy Efficiency that entered into force on

December 4th. Both of these laws provide a new legislative foundation for the provision of energy

services, and offer some opportunities for devising new approaches to tackling the problem of fuel

poverty.

The selection of measures explored in this report has been driven by the recommendations that

emerged from the June meeting of the Inter-Operational Working Group (IWG) of the project.

Underlying all of the recommendations, the IWG recognised an overarching principle that allows

sometimes conflicting goals to be accommodated: liberalize the energy markets to benefit from the

advantages that competition brings, and develop a separate social system to protect the vulnerable

consumers. This represents a significant departure from the current situation, where large market

distortions are introduced with the aim of addressing social objectives.

Based on the recommendations of the IWG, the areas explored in this report are:

Clarification of the basic concept of fuel poverty and a proposed definition for adoption in

Romania;

Analysis of energy efficiency obligation / white certificate schemes in other countries, and

the lessons that can be learned in defining such a scheme for Romania;

The role of flexible energy tariffs (in particular binomial versus monomial) especially with

regard to addressing the undesirable distributional impacts of other measures;

Issues surrounding the use of grants, subsidies and soft loans to promote energy efficiency

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renovation of buildings while protecting the interests of the fuel-poor. A soft loan scheme for

energy efficiency could be a component in a future Green Investment vehicle for Romania;

Models for the transition towards subsidies for energy efficiency, away from subsidies for

energy consumption.

Following an earlier draft of this report, a National Roundtable on Fuel Poverty was staged under

the auspices of the UNDP / GEF project in December 2012. This brought together a wide range of

stakeholders from ANRE, the Ministries of Economy and of the Environment, energy supply and

distribution companies, consumer groups and regional environmental associations, to discuss the

implementation of Article 7 of the EU Energy Efficiency Directive in Romania. This Final Report

takes account of the views expressed and conclusions drawn at that event, which can be

summarised as follows:

implementing an energy efficiency obligation scheme in Romania will present significant

challenges at present, not least because the energy suppliers and distributors upon whom

obligations would fall do not have the financial and managerial capacity to implement such a

scheme within the necessary timeframe. Discussions should therefore encompass the possibility of

alternative schemes, as permitted under Paragraph 9 of Article 7 of the Energy Efficiency Directive.

regardless of whether Romania opts for an obligation scheme or some combination of

permitted alternatives, there is a great need for transparency in setting the parameters of

any schemes implemented.

the implementation of one or more schemes in response to the Directive has the potential

to have a significant impact on fuel poverty, but to maximise this impact it is essential that

cost-effectiveness is an important criterion for the design of schemes.

a great deal of the data necessary for developing cost-effective and well-designed schemes

is currently absent. A task team should therefore be set up to guide the necessary studies.

close collaboration between ministries is essential. Clearly the ministries of Economy,

Environment and Regional Development have a key role to play, but the Ministry of Finance

must also be involved, because of the budgetary implications of potential schemes. The

objective of tackling fuel poverty also implies a strong role for the Ministry of Labour and

Social Protection. The consensus was that an inter-ministerial committee should be formed

as soon as possible to co-ordinate efforts, with its first task to develop a roadmap for

communication to the European Commission.

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2. CURRENT LEGISLATIVE AND POLICY FRAMEWORK

2.1. EU Legislation

The main pieces of EU legislation specifically relevant to the issues of fuel poverty and energy

efficiency of buildings are the new Directive on Energy Efficiency2, the two Directives for the

internal markets for electricity3 and gas4 and the Energy Performance of Buildings Directive5

(EPBD) with its 2010 recast6 (EPBD Recast). In keeping with the principles of subsidiarity, these

Directives permit Member States a certain degree of flexibility in how they are transposed into

national legislation.

When implementing EU legislation, Member States must heed the EU Charter on Fundamental

Rights. Article 34, paragraph 3 of the Charter7 has relevance to the issue of fuel poverty and the

energy efficiency of dwellings:

“In order to combat social exclusion and poverty, the Union recognises and respects the right to social and housing assistance so as to ensure a decent existence for all those who lack sufficient resources, in accordance with the rules laid down by Community law and national laws and practices.”

There can be little doubt that a household that lacks the means to achieve comfortable levels of

heating does not enjoy a “decent existence”, and it is questionable whether programmes that

merely provide financial assistance with energy bills to households living in sub-standard dwellings

provide a “decent existence”. There is therefore a strong case for arguing that, in order to be fully

consistent with the Charter on Fundamental Rights, policies and programmes to combat fuel

poverty must incorporate measures that result in improvements to the thermal performance of

buildings.

Directive on Energy Efficiency

After long debate, a final compromise was reached in June 2012 on a new EU Directive on Energy

Efficiency, which came into force in December 2012. This new EU legislation is particularly

relevant to the subjects discussed here. For example, Recital 16 of the new Directive8 states that:

“Member States should establish a long-term strategy beyond 2020 for mobilizing

investment in the renovation of residential and commercial buildings with a view to

improving the energy performance of the building stock. This strategy should address

cost effective deep renovations which lead to a refurbishment that reduces both the

delivered and the final energy consumption of a building by a significant percentage

compared with the pre-renovation levels leading to a very high energy performance”.

Recital 18 acknowledges that an EU-wide "white certificate" scheme would create excessive

administrative costs, and may lead to savings being concentrated in a small number of Member

States. However, it recognises the value of defining a common framework within which national

energy efficiency obligation schemes would be created.

“The common framework should give energy utilities the option of offering energy

2 European Parliament (2012)

3 European Union (2009a)

4 European Union (2009b)

5 European Union (2003)

6 European Union (2010a)


8 Note that the Recital and Article numbers referred to here are those in the version of the Directive as

adopted by the European Parliament in September 2012.

5

services to all final customers, not only to those to whom they sell energy. This

increases competition in the energy market because energy utilities can differentiate

their product by providing complementary energy services. The common framework

should allow Member States to include requirements in their national scheme that

pursue a social aim, notably in order to ensure that vulnerable customers have access

to the benefits of higher energy efficiency.”

The main provisions of the new Directive are as follows:

o Targets

Article 3 requires each Member Sate to establish a national indicative target for energy

efficiency (based on either primary or final energy consumption, primary or final energy

savings, or energy intensity) to be achieved by 2020. By June 2014, the Commission will report

if these targets summed across Member States will permit the EU to reach its global target.

The global target is specified for the first time, at 1,474 Mtoe of primary energy consumption or

1,078 Mtoe of final energy consumption. If the EU is not on track to reach the target, the

Commission will propose additional measures.

o Building renovation

Article 4 requires Member States to develop long-term strategies to promote investment in the

renovation of the national building stock, both commercial and residential. Strategies must

include an overview of the current state of the building stock as well as policies and measures

to stimulate cost-effective ‘deep’ renovations. Strategies should be published by April 2014.

o Exemplary role of the state

Under Article 5, Member States must renovate annually 3% of the surface of government’s

buildings or adopt other measures that will achieve equivalent energy savings. They are also

required to encourage public bodies (which includes local authorities and social-housing bodies

governed by public law) to adopt energy efficiency plans (which may be part of broader

environmental plans) and to put in place energy management systems.

Recital 54 suggest that available Union financial instruments plus innovative mechanisms are

used in reaching the objective of improved performance in public buildings. Member States can

use revenues from the annual emission allowances according to Decision No 406/2009/EC, but

taking into account the national budgetary rules.

o Obligation schemes

Article 7 requires each Member State has to establish an energy efficiency obligation scheme.

This scheme must ensure that designated obligated parties (energy distributors and/or retail

energy sales companies operating in the Member State’s territory) achieve cumulated energy

savings that reach the specified target by 31 December 2020. This target will be equivalent to

achieving new savings each year from 1 January 2014 to 31 December 2020 equal to 1.5% of

annual energy sales by all distributors and retailers.

Member States may include within their energy efficiency obligation scheme requirements with

a social aim, for example requiring that measures implemented under the obligation are

prioritised towards households affected by fuel poverty. Member States may permit obligated

parties to count towards their obligation certified savings achieved by third parties. This may be

through a scheme of certificates, in such a way that obligated parties can “purchase” energy

savings from other sectors or consumers.

As an alternative to an energy efficiency obligation, Member States can apply other policy

measures, but they must demonstrate that these will generate the same amount of savings. An

6

intention to adopt alternative policy measures must be notified to the Commission within one

year of the Directive entering into force.

o Heating and cooling

By 31 December 2015, Article 14 requires Member States to have carried out an assessment

of its potential for cogeneration and centralized district heating. With a few exceptions,

whenever power generation plant in excess of 20MW capacity is built or extensively

refurbished, a cost-benefit analysis must be conducted to assess the feasibility of applying

high-efficiency cogeneration or district heating / cooling. Where the results of the cost-benefit

analysis are positive, Member States must take “adequate measures” to develop these

solutions.

Article 15 requires that, with a few exceptions, network operators must guarantee transport and

distribution of electricity produced by high efficient cogeneration, to give priority and

guaranteed access, and priority dispatching.

o Energy services

Under Article 18, Member States are required to promote the energy service market, and

access by SMEs to this market, by disseminating information on energy performance contracts

and on energy service companies, and encouraging development of energy quality labelling.

Member States must ensure that energy distributors and retailers do not impede the

development of energy services markets.

o Monitoring and reporting

Article 24 lays out the requirements for monitoring and reporting on the implementation of the

provisions of the Directive. Member States are required to report annually on progress towards

achieving national energy efficiency targets. Every three years, Member States must submit a

detailed Energy Efficiency National Action Plan, according to a guidance template provided by

the Commission. The Commission will evaluate the reports and plans, and communicate its

evaluation to Parliament and the Council. They may also make recommendations to Member

States.

The Commission will monitor the impacts of the new Directive in a number of areas, specifically

on the EU Emissions Trading Scheme, the Directive on Renewables, the Energy Performance

of Buildings Directive, on “effort sharing” to reduce greenhouse gas emissions, and on those

industrial sectors that are exposed to “carbon leakage”.

Directives on the internal markets for electricity and gas

The relevant parts of the Directives on the internal markets for electricity and gas are almost

identical in their wording, with the word 'electricity' substituted for 'gas'. Both Directives include a

Recital that states:

“Member States which are affected and which have not yet done so should therefore

develop national action plans or other appropriate frameworks to tackle energy

poverty, aiming at decreasing the number of people suffering such situation...

measures could include social policies or energy efficiency improvements for housing.

At the very least, this Directive should allow national policies in favour of vulnerable

customers”.

Article 3 in each of the Directives requires that:

“Member States shall take appropriate measures to protect final customers, and shall,

in particular, ensure that there are adequate safeguards to protect vulnerable

7

customers. In this context, each Member State shall define the concept of vulnerable

customers which may refer to energy poverty and, inter alia, to the prohibition of

disconnection of electricity (gas) to such customers in critical times.”

“Member States shall take appropriate measures, such as formulating national energy

action plans, providing benefits in social security systems to ensure the necessary

electricity (gas) supply to vulnerable customers, or providing for support for energy

efficiency improvements, to address energy poverty where identified, including in the

broader context of poverty.”

While requiring that vulnerable customers are protected, the Directives are not prescriptive about

how this should be achieved, merely suggesting that measures adopted might include support for

energy efficiency improvements to housing.

The Energy Performance of Buildings Directives

The original EPBD makes no mention of fuel poverty or vulnerable groups, while the 2010 EPBD

Recast mentions the issue only once, in Recital 20:

“In order to provide the Commission with adequate information, Member States

should draw up lists of existing and proposed measures, including those of a financial

nature, other than those required by this Directive, which promote the objectives of

this Directive. The existing and proposed measures listed by Member States may

include, in particular, measures that aim to reduce existing legal and market barriers

and encourage investments and/or other activities to increase the energy efficiency of

new and existing buildings, thus potentially contributing to reducing energy poverty.

Such measures could include, but should not be limited to, free or subsidised

technical assistance and advice, direct subsidies, subsidised loan schemes or low

interest loans, grant schemes and loan guarantee schemes. The public authorities

and other institutions which provide those measures of a financial nature could link the

application of such measures to the indicated energy performance and the

recommendations from energy performance certificates.”

The fact that EPBD and EPBD Recast make almost no mention of vulnerable groups is perhaps

not surprising. The question of the level at which it is economically and technically optimal to set

energy performance standards of a building does not, and should not, depend on the economic

status of the users of that building.

With regard to the energy efficiency retrofitting of existing residential and public buildings, the most

significant parts of the EPBD Recast are as follows:

Recital 8 states that measures to improve the energy performance of buildings should take

into local conditions as well as cost-effectiveness, and should not affect accessibility, safety

and the intended use of the building.

Recital 10 gives Member States the sole responsibility for setting minimum requirements for

the energy performance of buildings and building elements, and specifies that requirements

should be at such a level as to ensure cost-optimality over the lifecycle of the building.

Recital 14 requests that the Commission defines a methodology framework for calculating

cost-optimal levels of minimum energy performance requirements9, and states that Member

States should use this framework to compare the results with the minimum energy

performance requirements which they have adopted. Any significant discrepancies should

9 This methodology framework was published in January 2012 as European Commission document

“C(2001)/10050 final”.

8

either be justified, or reduced through appropriate steps.

Article 2, Paragraph 10 defines a 'major renovation' either as one where the cost is greater

than 25% of the value of the building, or one that involves more than 25% of the surface of

the building envelope. The Article also allows Member States to choose either of these

definitions10.

Article 5, Paragraph 2 requires Member States to use cost-optimality calculations to set

levels of minimum energy performance requirements, along with other relevant parameters,

such as climatic conditions and the practical accessibility of energy infrastructure.

Article 7 requires Member States to ensure that the same minimum energy performance

requirements are applied when buildings undergo major renovation, in so far as this is

technically, functionally and economically feasible. This Article also requires that the same

minimum energy performance requirements are applied when a building element that forms

part of the building envelope and has a significant impact on the energy performance of the

building envelope, is retrofitted or replaced – again, in so far as this is technically,

functionally and economically feasible.

2.2. Other EU Policy Documents

There is a significant body of additional material produced by various EU bodies on the subject of

fuel poverty but none of this currently has the status of legislation. The most significant of this

material is described in the following sections.

European Economic and Social Committee Opinion on Energy Poverty

In 2009, in preparation for its forthcoming presidency of the Council of the EU, the Belgian

government requested the European Economic and Social Committee (EESC) to investigate the

subject of “Energy Poverty in the Context of Liberalisation and the Economic Crisis”. This work

took place during the first half of 2010 and resulted in the adoption by the EESC of an 'exploratory

opinion' on the subject11. The EESC Opinion observed that many Member States were not fulfilling

their obligations with regard to protecting vulnerable customers, and made a number of

suggestions, including:

that the EU adopt a common general definition of energy poverty

that Eurostat and the statistical offices of Member States adopt homogeneous statistical methods to enable them to quantify the extent of energy poverty

that energy poverty is taken into account when any proposal on energy policy is drawn up

that, as and when possible, Member States should consider setting up measures to assist low-income households to improve the energy performance of private homes.

According to Article 288 of the Treaty on the Functioning of the European Union12, such opinions

have no binding force. However, it is to be expected that at least some of their suggestions will find

their way into future EU legislation.

European Commission Action Plans for Energy Efficiency

The European Commission's 2006 Action Plan for Energy Efficiency13 outlined a framework of

10

The EPBD Recast does not make it clear whether this is a once-and-for-all choice that must be made when the EPBD is transposed into national legislation, or whether the choice can be made on an individual case-by-case basis.


12 European Union (2010b)

13 European Commission (2006)

9

policies and measures for realising the energy savings potential within the EU that had been

identified previously. The Action plan identified the residential and commercial buildings sectors as

offering the greatest cost-effective energy savings potential, and laid the foundations for the

subsequent recast of the EPBD. Although the Action Plan was intended to “mobilise the general

public and policy-makers at all levels of government”, it made no specific mention of vulnerable

sections of the population.

In December 2010, the European Parliament passed a resolution14 for the revision of the Action

Plan for Energy Efficiency. This resolution observed in its Recitals that policies for improved energy

efficiency in buildings are “strategic remedies for energy poverty”, and in Article 7 called on the

European Commission to design a new Energy Efficiency Action Plan that would “take into account

the needs of vulnerable energy consumers”, noting that they would “benefit the most from energy

efficiency improvements, but lack resources to undertake the necessary investments”. Article 101

of the Resolution repeated the call in the EESC Opinion that “the social dimension to the energy

dialogues, covering aspects such as human rights, energy poverty and the protection of low

income consumers, should always be taken into account while developing energy policies”.

Like the EESC Opinion described above, Resolutions of the European Parliament carry no binding

force. While the new Energy Efficiency Action Plan15 published by the Commission in 2011

contains a much stronger emphasis on energy efficiency in buildings than its predecessor, the calls

in the European Parliament Resolution to address the needs of vulnerable consumers do not seem

to have been heeded. The new Action Plan contains only one passing reference to the needs of

vulnerable groups, observing that:

“Member States need to reform subsidies promoting energy use, for example by reorienting them to improve energy efficiency and address energy poverty”.

European Commission Energy 2020 Strategy

In 2010, the European Commission outlined its energy strategy for the next ten years in a

document that again identified buildings as offering (along with transport) the greatest potential for

energy savings. Amongst other things, the strategy recommended that public procurement rules

should insist on energy efficiency conditions in buildings and that measures should be taken to

speed up renovation rates. Given that this strategy document is very concise and covers all

aspects of energy supply, trade and end-use, it is perhaps unsurprising that it does not specifically

address the needs of vulnerable sections of the population.

European Commission Staff Working Paper on an Energy Policy for

Consumers

This Staff Working Paper, produced in 2010 by the European Commission16, had the purpose of

taking stock of the consumer benefits of existing policy measures, comparing good and bad

practices and identifying what more could be done in the interests of consumers. On the subject of

defining fuel poverty, the paper concluded that the lack of a uniform definition across the EU was

not a problem and that:

“Given the diverse situations of energy consumers in different parts of the EU, the Commission does not consider it appropriate at this stage to propose a European definition of energy poverty or of vulnerable customers”.

Apart from these observations, the paper did not put forward any significant new ideas relating to

14

European Parliament (2010) 15

European Commission (2011) 16

European Commission (2010)

10

fuel poverty, but merely reiterated the existing obligations under the Directives on internal markets

for gas and electricity.

An Annex to the working paper does, however, attempt to quantify the extent to which households

in Member States face a “significant energy expense burden”. Using Eurostat data on household

budgets, estimates are made of the number of households in each EU country where the

proportion of household expenditure devoted to energy is more than double the national average.

Using this criterion, the fraction of households facing a significant energy expense burden ranges

from a little over 6% in Bulgaria, Cyprus, Latvia and Malta, up to over 19% in Estonia, Slovakia and

the United Kingdom. Interestingly, the Annex also showed that there was very little correlation

between the percentage of households facing a significant energy expense burden and the

percentage of households that are in arrears with their utility bills.

2.3. Romanian Legislation

The new Law on Electricity and Gas No. 123/2012 was adopted by the Romanian Parliament on

14 June 2012, and was necessary for two main reasons:

Electricity and gas internal markets are required to comply with the provisions of the 3rd

legal package (specifically the Directives 2009/72/EC and 2009/73/EC), which Romania

implements through this new law. This single law covers both electricity and gas markets,

defining the main rules of these markets and strengthening the independence of the

Romanian regulator.

Romania’s commitments in the existing agreements with the IMF, World Bank, and

European Commission.

The main changes that the new law will bring about are:

The law considers an Independent System Operator model for Transport System Operator;

Gradual liberalisation of electricity and gas markets (deadlines are 2013 for non-households

and 2017 for households);

Increased regulator independence by imposing the control of this authority at the level of

Romanian Parliament;

Concerning consumer protection, a Commission for Dispute Settlement will be established

inside the National Regulatory Agency for Energy as a first step to solve divergences

between energy markets actors for consumers’ benefit.

Vulnerable consumers can benefit of social protection measures of a financial nature that

will allow them to pay their for energy consumption.

The law allows for secondary legislation to define:

o Conditions and criteria that will apply to social protection measures,

o Other facilities, such as ANRE to define the way in which high efficiency

cogeneration can benefit from a bonus

Obviously, the new law has an impact on Romania’s existing legal framework. This will

necessitate:

a) modification of normative acts that are not compatible with the new law;

b) new laws, ordinances or Government Decisions that will regulate:

o who are the vulnerable consumers, quantum of minimum consumption, quantum of

needed compensations, way to protect consumers in case of supply failures;

o to define public service obligations (safety of supply, crisis situations, etc.);

o to establish the way in which companies can recover the obligatory costs for public

and/or universal service;

11

o establish how other issues will be solved (e.g. guaranteed access to the grid,

certifications, etc.)

The new law is a positive step ahead, but some issues have not been clearly resolved. Among

them, the following should be highlighted:

Universal service definition is still unclear and it is not delimitated of the definition of public

service and it is given only for electricity.

In compensation, the public service is not defined in the electricity section:

Article 80 deals with the price / tariff capping:

(1) In situations of major unbalances between demand and offer (…), the Government, at the

ANRE’s proposal and Competition Council’s approval, can cap the excessive increase of

prices/tariffs or their blockage for a period of 6 months, a time span that can be successively

prolonged for durations of 3 months, as long as the circumstances persist (…) by:

a) fixing a ceiling for the price on a centralized market;

b) limiting the revenue from the regulated activity.

(2) Costs recognized and delayed, according with provisions of paragraph (1b) will be totally

recovered, in conformity with the procedures issued by the competent authority.

For consumers of natural gas, Article 180 of Title II establishes the right of final clients to benefit

from the mix of domestic and import gases with a corresponding basket price. This provision will

apply until the convergence of domestic gas price with the imported gas.

12

3. POSSIBLE POLICY MEASURES FOR ROMANIA

The purpose of this section is to examine more closely a number of possible policy measures that

could enable Romania to meet its legal obligations under Article 7 of the EU Energy Efficiency

Directive, while simultaneously addressing the goal of tackling fuel poverty. As a necessary first

step, an effective definition of fuel poverty must be devised for Romania – a need that has been

recognised since the PPG phase of this project in 2010, and which the project’s Inter-Operational

Working Group reinforced at their meeting in June 2012.

Since the main type of policy measure envisaged under Article 7 of the Energy Efficiency Directive

is an energy efficiency obligation scheme, this section includes a review of international

experiences with such schemes. However, the Directive also makes allowance for Member States

to opt for alternatives to energy efficiency obligation schemes. In particular, Paragraph 9(b) of

Article 7 refers to “financing schemes and instruments or fiscal incentives...”, so this section also

explores some of these possible alternatives.

The primary aim of Article 7 of the Energy Efficiency Directive is a reduction in energy sales to

consumers – something which at first sight would appear to be entirely consistent with the goal of

reducing fuel poverty. However, consistency cannot always be assumed, and in some cases the

goals of fuel poverty alleviation and energy saving may be in direct conflict. For example:

the UK’s Energy Efficiency Commitment (EEC) and Carbon Emissions Reductions Target

(CERT) schemes were ostensibly aimed at climate change mitigation, but were also

positioned as major components in the fight against fuel poverty. However, the regressive

way in which the costs of the schemes were passed through to consumers resulted in some

households being pushed further into fuel poverty.

‘heat aid’ subsidies in Romania, introduced to alleviate the financial burden of energy bills

on low-income households, also have the effect of destroying the cost-effectiveness (as

perceived by those households) of energy efficiency improvements. This not only tends to

lock households into current consumption patterns, but also undermines efforts to

incentivise reductions in energy use in buildings.

fuel-poor households are frequently forced to limit their energy consumption to sub-optimal

levels because of financial hardship. Because of this suppressed demand, energy

efficiency improvements may not result in a reduction in consumption – instead, the

benefits may be taken in the form of increased comfort.

The challenge is to integrate policy measures in such a way that potential conflicts between

objectives are resolved. In attempting to integrate a number of different policy measures into a

coherent whole, it is worth considering the so-called ‘Tinbergen Rule’ which states that:

“Consistent economic policy requires that the number of instruments equal the

number of targets. Otherwise, targets are incompatible or instruments alternative.”17

This maxim suggests that expecting a single instrument to be able to meet multiple objectives

inevitably requires a trade-off to be made between the relative priorities of the objectives. The

result is usually that none of the objectives are met in a satisfactory way. This principle has already

been alluded to in the recommendations made to the Inter-Operational Working Group (IWG) by

the National Energy Efficiency Expert:

“...liberalize the energy markets and benefit from the competition’s advantages and

develop a separate social system to protect the vulnerable consumers.”18

17

Tinbergen (1952) 18

Musatescu (2012)

13

In exploring appropriate policy measures for adoption by Romania, a strong focus should therefore

be placed on ‘policy integration’ rather than ‘policy dilution’19. With this in mind, the following

sections explore in detail some of the priority areas identified and agreed upon in the June 2012

meeting of the project Inter-Operational Working Group.

3.1. Defining fuel poverty

Although the general concept of fuel poverty is relatively clear in the minds of most people, a

precise definition is more elusive. However, if policy instruments are to be introduced to tackle the

condition, it is vitally important that it is defined in a way that: (i) makes it feasible to target those

instruments in a way that achieves the intended outcome; (ii) allows the effectiveness of the policy

instruments to be assessed against targets in an objectively verifiable manner.

The suggestion that a new definition of fuel poverty was needed for adoption in Romania was first

made during the Project Preparation phase of this project. The Inter-Operational Working Group

has reiterated this need in its June 2012 meeting20. The following section examines the issue in

more detail and makes specific recommendations for a definition of fuel poverty appropriate for

Romania’s needs.

Background

Since the term 'fuel poverty' first became generally known (Boardman, 1991), there has been much

debate centred around two questions. Firstly, is the concept of fuel poverty a useful one, in the

sense that it represents a distinct condition, or is it merely a manifestation of general poverty?

Secondly, assuming that one accepts that fuel poverty is a useful description, how it should be

defined? With regard to the first of these questions, the overwhelming view of academics,

commentators and policymakers is that fuel poverty is indeed a distinct condition, which needs to

be tackled with different policy measures from those used to address general poverty.

The second question, that of defining fuel poverty, has received comparatively little attention. Once

it is accepted that fuel poverty is distinct condition requiring a specific set of policies and measures

to tackle it, a definition is required that allows the effective targeting of those policies and

measures, and the evaluation of their impact. The definition should be chosen such that the

classification of a household as fuel-poor clearly distinguishes it from households that are merely

poor. It must also be practically applicable, allowing the agencies responsible for implementing fuel

poverty initiatives to identify the intended target groups.

The initial definition used by Boardman (1991) was based on energy expenditure as a fraction of

income. A household was defined as 'fuel-poor' if it would need to spend more than 10% of its

income on energy in order to achieve adequate levels of comfort. The definition uses 'deemed'

energy consumption (i.e. a calculated figure based on the thermal characteristics of the dwelling

and the occupancy patterns) rather than actual energy consumption. This is necessary to ensure

that a household that suffers uncomfortably low indoor temperatures in an attempt to reduce its

energy expenditure to an affordable level is still classified as fuel-poor.

This expenditure-based definition of fuel poverty was adopted by the UK Government and has

been used with no further significant modifications as the basis for policy. However, the definition is

unsatisfactory for a number of reasons:

The definition fails to make a sufficiently clear distinction between fuel poverty and general

poverty. Data from the UK Department of Energy and Climate Change indicates that 43%

19

See Liberatore (1997) for insights into this subject 20

Musatescu (2012)

14

of the households in England that were fuel-poor in 2007 were categorised as such only

because of their low income. These households did not have unusually high energy bills,

and did not live in thermally poor dwellings, so the measures that would be necessary to

alleviate their condition would be completely unconnected with energy.

The UK Government has set a goal of eliminating fuel poverty by 2016, yet the definition of

fuel poverty makes it difficult to target initiatives to achieve this. Instead, proxy indicators

are used for determining eligibility, such as being in receipt of certain welfare benefits, or

having household members over the age of 70. None of these proxies correlates

particularly closely with the fuel-poor designation, with the result that the number of

households that are lifted out of fuel poverty by current initiatives has been insufficient to

make a significant contribution to achieving the goal of eliminating fuel poverty. For

example, it is estimated that 75% of households that would qualify for assistance under the

'Warm Front' initiative are not fuel-poor.

Under the current definition, the fuel poverty status of households is very strongly affected

by energy prices. Increasing energy prices were by far the strongest factor behind the

sharp rise in the number of fuel-poor households in the UK during the mid to late-2000s.

About two-thirds of the observed change in fuel poverty numbers was due to changes in

energy prices. This strong dependence on an exogenous variable means the current

definition of fuel poverty is very unsatisfactory as a performance indicator for policy

measures, and it makes the task of eliminating fuel poverty particularly challenging.

The characterisation of fuel poverty included in the UK Warm Homes and Energy Conservation Act

was a household that is “living on a lower income in a home that cannot be kept warm at

reasonable cost”. Few would question this as being an accurate representation of the problem but,

as observed by Hills (2012), this is not what the current expenditure-based indicator used in the UK

actually measures.

Some attempts have been made to devise alternative indicators of fuel poverty, based on the

presence or absence of certain 'socially perceived necessities' in a household21. These necessities

might include an adequate heating system, walls and floors free from damp, an intact roof, window

and door frames free from rot, utility bills not in arrears. Such a definition of fuel poverty suffers

from the major shortcoming that it is largely independent of a household's financial circumstances.

There are many reasons other than low income why a household may fail to remedy its lack of one

of the necessities mentioned – for example, lack of motivation, lack of awareness. This type of

definition could therefore lead to relatively wealthy households being classified as fuel-poor – a

result that seems intuitively wrong. Definitions of fuel poverty based on such perceived necessities

have not been officially adopted by any government.

Review conducted under the Project Preparation phase

An analysis of the relative merits of different definitions of fuel poverty was undertaken as part of a

Review of International Best Practice, conducted during the Project Preparation phase of this

current project22. This analysis concluded that none of the definitions of fuel poverty considered to

date was entirely satisfactory for official adoption in Romania. Instead, a new definition was put

proposed, based on the observation that both low household income and high energy costs must

be present before fuel poverty can be said to exist. Rather than using actual observed energy

costs to determine the fuel poverty status of a household, the proposed definition of fuel poverty

would use a set of indicators of high energy costs. A household would be categorised as having

21

The most comprehensive work on this is probably Healy (2004). 22

Househam (2010)

15

high energy costs if it suffered any of the following:

occupying a dwelling with poor thermal performance

lacking access to reasonably priced energy sources

lacking an effective / adequate heating system

Applying this definition of fuel poverty requires thresholds to be set for household income, thermal

performance of dwellings, a reasonable price for energy sources and the adequacy of a heating

system. A household whose income is below the designated threshold, and which suffers any one

of the three indicators for high energy cost, would be defined as fuel-poor. The review also made

some tentative suggestions regarding the levels at which these thresholds might be set:

The household income threshold should represent the level at which a household could

afford to remedy the factors that result in high energy costs without requiring assistance. It

was suggested that this be set at between 80% and 100% of the mean household income

for the country.

The appropriate level for the thermal performance threshold was suggested as being equal

to the standard mandated in the national thermal rehabilitation programme, namely an

annual consumption of 100 kWh/m2. In practice, specific thermal consumption would not be

measured on a case-by-case basis, but would rather be inferred from the construction type

and occupancy levels of the dwelling, taking into account any energy efficiency

improvements that have been made.

It was proposed that the price threshold be set at such a level that, if an average income

household living in a reasonably thermally efficient dwelling were to pay the threshold unit

price for energy, their energy bill would account for 10% of their disposable income. This

resulted in a threshold level of 150 lei/MWh, although the rough calculation used to arrive at

this figure was somewhat flawed.

No suggestion was made regarding an appropriate threshold for the adequacy of heating

systems, as it was felt that there was no simple way of quantifying this as a single variable.

The Hills Review

In the period since the new definition of fuel poverty was proposed in the Project Preparation

phase of this current project, the fuel poverty debate in the UK has moved forward. In March 2011,

the UK Secretary of State for Energy and Climate Change commissioned an independent review of

fuel poverty. The study23 (the 'Hills Review'), undertaken by John Hills of the London School of

Economics, represents one of the most comprehensive studies of fuel poverty undertaken

anywhere in recent years. An important part of the study was an examination of possible improved

definitions to replace the current expenditure-based definition. Hills concluded that a new definition

of fuel poverty should be based on “low income, high costs” (LIHC) criteria. In this regard, the

definition proposed in the Hills Review is very similar to that put forward during the Project

Preparation phase of this project.

An additional feature of the fuel poverty metric proposed by Hills was the inclusion of an indicator

of the 'fuel poverty gap'. This would be calculated as the sum across all fuel-poor households of

the extent to which their 'deemed' energy costs exceed the threshold level. The fuel poverty gap is

an important concept, as it allows both the extent and the depth of the problem to be quantified.

The effects of interventions can thus be more precisely assessed – an initiative may have the

effect not only of lifting some households out of fuel poverty, but also of reducing the depth of fuel

23

Hills (2012)

16

poverty experienced by those households that remain fuel poor. The current definition, which

provides only a ‘headcount’ indicator, would be incapable of quantifying impacts to this level of

detail.

The fuel poverty definition proposed by Hills would set the ‘low income’ threshold at 60% of the

median level. The household income figure used would be after housing costs have been allowed

for. Furthermore, it would use an ‘equivalised’ household income figure (rather than actual

household income), which takes into account the fact that the resources a household needs in

order to achieve a given standard of living depend on household size and composition. However,

the required resources do not increase linearly with the number of household members, so a set of

correction factors are used to weight actual income according to how many adults and children a

household contains.

The ‘high energy costs’ threshold in the proposed Hills definition of fuel poverty would be set at the

median level for household energy costs. The energy costs figure used would be modelled, rather

than actual, as is the case with the current expenditure-based definition. As was the case for

household incomes, the energy costs figure would be equivalised to take account of household

size and composition. Although this particular aspect of the fuel poverty definition met with some

disagreement from the respondents to the consultation phase of the review, it is justified on the

grounds that the level of energy expenditure that can be considered reasonable depends on the

size and composition of the household.

The proposed LIHC fuel poverty indicators are clearly superior in a number of respects to the

currently used expenditure-based definition. An obvious example of LIHC’s superiority is that it

does not classify as fuel-poor those households who live in energy efficient homes but who are on

very low incomes.

One of the most striking differences between Hills’ LIHC definition of fuel poverty and the current

definition can be seen when fuel poverty trends in England are plotted for the period from 1996 to

2009. It can be seen in Figure 1 below that the current indicator shows a huge fall in fuel poverty

numbers between 1996 and 2003, followed by a rapid rise from 2004 onwards. The LIHC indicator

remains fairly steady, with a slight rise from 2006 onwards. Much of the variability shown by the

current indicator is caused by changes in energy prices, which have a much weaker effect on the

LIHC indicator.

It is undoubtedly true that the rapidly increasing energy prices experienced during the late 2000s

represented a serious hardship for many households. However, there are advantages to using a

fuel poverty indicator that is relatively unaffected by energy price fluctuations. The main purposes

of a fuel poverty indicator are to identify those households that should be targeted with specific fuel

poverty alleviation measures, and to enable the success of those measures to be assessed. An

indicator that fluctuates widely in response to energy price changes is not particularly helpful in

these respects, so in this regard the LIHC indicator is clearly more useful.

17

Figure 1 Number of households and individuals (millions) in fuel poverty in England, 1996-

2009. Comparison of existing and proposed new LIHC indicators

© Crown copyright reproduced from Hills (2012)

Important though the ‘headcount’ figure for fuel poverty is, Hills proposes that the primary indicator

should be the size of the fuel poverty gap. Assessing the success of measures according to their

impact on the fuel poverty gap would ensure that resources are focussed on those households in

greatest need of assistance, whereas using the headcount figure would tend to result in resources

being directed to those just below the fuel poverty threshold. Figure 2 shows the trends from 1996-

2009 in fuel poverty gap in England (both aggregated and average) using the LIHC indicator.

Figure 2 Average and aggregate fuel poverty gap in England, 1996-2009

© Crown copyright reproduced from Hills (2012)

Unlike the headcount figure for fuel poverty, the total fuel poverty gap is relatively strongly affected

by changes in energy prices. This would not have any adverse effect on the use of this indicator to

target those households that are in the deepest levels of fuel poverty, as the relative depth of fuel

poverty experienced by different households would not be affected by energy price changes.

However, the strong dependence of the fuel poverty gap on energy prices would make it somewhat

difficult to use as an indicator for the success of policies. More importantly though, Hills observes

that the fuel poverty gap indicator based on LIHC:

18

“...creates an incentive for Government and those delivering policy to ensure that

sustainable improvements are made to the homes of those households in the deepest

fuel poverty, because this will have the biggest impact on the aggregate fuel poverty

gap. As prices rise and the fuel poverty gap increases, the cost of making sustainable

improvements – as opposed to alleviating fuel poverty through price policies or

rebates on bills – remains the same.”

In other words, using an LIHC-based fuel poverty gap indicator would strengthen the case for

tackling fuel poverty through long-term improvements in the energy efficiency of homes, rather

than relying on energy subsidies. This is in sharp contrast to the current expenditure-based fuel

poverty indicator under which, in principle, huge reductions in fuel poverty could be achieved

simply by subsidising the energy bills of low-income households.

An interesting feature of the proposed LIHC indicator is that the energy cost threshold is based on

the typical costs for the whole housing stock. This means that a general increase in the energy

efficiency of the housing stock could result in some households that do nothing being pushed into

fuel poverty. Initially, this seems contrary to the intention behind the WHECA characterisation of

fuel poverty, of a household that is “living on a lower income in a home that cannot be kept warm at

reasonable cost”. A general increase in the energy efficiency of the housing stock does not affect

the ability of a ‘do-nothing’ household to keep warm, nor does it affect the cost of doing so. The

Hills Review acknowledges this, but goes on to state that:

“While some stakeholders see the last effect as a problem of the proposed indicator,

we believe this feature should be seen as an advantage because it would show fuel

poverty rising if energy efficiency improvements left low- income households falling

behind. ”

To summarise, the Hills Review has proposed new indicators for fuel poverty that are superior to

the current definition is almost every respect. Most importantly, the LIHC indicators match closely

the intuitively correct narrative characterisation of fuel poverty as “living on a lower income in a

home that cannot be kept warm at reasonable cost”. However, it is not known at the time of writing

whether the UK Government intends to adopt the Hills LIHC indicators of fuel poverty.

Recommendations for Romania

It would appear clear from both Househam (2010) and Hills (2012) that an appropriate definition for

fuel poverty for Romania should be based on the ‘low income, high costs’ principle. At least initially,

the definition adopted should be both simple and easily applied – there is little point in adopting a

definition that cannot be usefully applied until large amounts of new data are collected. However,

there are advantages to choosing an initial definition of fuel poverty that can be adjusted

incrementally, as the availability of data increases.

The procedures required for determining the fuel poverty status according to the Hills definition

would appear to be unnecessarily complex. According to data provided by Hills, there is a very

strong correlation between the LIHC status of a household and the energy performance of the

dwelling according to its Energy Performance Certificate (EPC) band. About 76% of households

classified as LIHC live in homes with an E, F or G rating. If the D band is also included, households

in these bands account for 98% of LIHC households. It would therefore seem that fuel-poor

households could be identified simply by using an income indicator combined with the EPC rating

of the dwelling. By combining an income indicator with the EPC rating of the dwelling, the

possibility of a ‘Type II error’24 is almost eliminated. The possibility of a ‘Type I error’25 cannot be

24

Namely, failing to classify as fuel-poor a household that should be so classified. 25

Incorrectly classifying as fuel-poor a household that should not be so classified.

19

determined from the data available in Hills, but it would appear to be unlikely, since relatively few

households occupying dwellings with low EPC ratings would have low energy costs.

It is therefore recommended that Romania adopts a definition of fuel poverty based on that outlined

in Househam (2010). This would define fuel poverty as existing in any households that

simultaneously suffers low income and high energy costs, where high energy costs are not directly

measured, but rather are indicated by either: (i) lack of access to reasonably priced energy

sources, or (ii) a dwelling with poor thermal performance. A third criterion for high energy costs was

included in Househam (2010), that of lacking an adequate heating system. It is recommended that

this criterion is not included for the current definition, as it is difficult to devise an objectively

verifiable indicator for ‘adequacy’ of a heating system.

To complete the definition of fuel poverty, threshold levels have to be set for each of the criteria

defined above. Although tentative suggestions were made during the Project Preparation phase for

the levels of these thresholds, these were probably inappropriate and require revising:

the income threshold should be revised to be the same as that recommended by Hills,

namely 60% of median household income. However, unless the necessary data already

exists, it is not recommended that equivalisation is used in the initial period, but that the

possibility of introducing it at a later date is retained.

the thermal performance threshold should be set at a higher (i.e. less stringent) level than

that achieved by a dwelling newly rehabilitated under the national programme. In the

Project Preparation phase, it was suggested that the threshold could be set at this level, but

this is irrational since it would mean that a low-income household living in a dwelling that

has been rehabilitated to the mandated standard would still be on the margin of fuel

poverty. Instead, it is recommended that the threshold is set at a level corresponding to the

lower end of the typical range found in pre-1990 buildings, namely 140 kWh/m2 annually.

the reasonable price threshold should be set at such a level that, were this price to be paid

by an average household living in a reasonably thermally efficient home, their energy bills

would represent an unreasonable financial burden (for example, 10% of income). Under the

Project Preparation phase, the resulting price threshold was approximately 150 lei/MWh,

but this was using very poor quality data. Recalculating using currently available data gives

a threshold of about 260 lei/MWh.

It should be emphasised that these threshold levels are tentative estimates based on the data

available. It is recommended that they are revised following a period of consultation with key

stakeholders.

The advantages of the proposed definition relative to the Hills definition are:

it is immediately workable without the need to collect substantial amounts of additional data.

If the decision is subsequently made to apply equivalisation to incomes (as per Hills), this

can be incorporated without needing to adjust the basic definition.

it avoids classifying as fuel-poor those households whose energy costs are high solely

because of the excessive floor area of their dwelling. It seems intuitively reasonable that a

household living in a grossly under-occupied dwelling that is thermally sound should not be

classified as fuel–poor.

However, a particularly strong feature of the Hills approach that it is recommended to retain for

Romania is the definition of a ‘fuel poverty gap’ indicator. This provides a way of quantifying not

just the extent, but also the depth of fuel poverty. In keeping with the approach of Hills, this gap

should be expressed in terms of how far from the energy costs threshold a household is, rather

than how far from the income threshold. This avoids the possibility of closing the fuel poverty gap

simply by subsidising energy prices.

20

Under the currently proposed definition, the starting point for determining the fuel poverty gap

would be to calculate a composite threshold for reasonable energy cost per unit floor area, by

multiplying the thermal performance threshold (in MWh per m2) by the energy price threshold (in lei

per MWh). The fuel poverty gap for a low-income household would then be calculated by

multiplying this composite threshold by the floor area of the dwelling, and calculating the difference

between the result and the ‘deemed’ energy costs26 for the household. The cumulative fuel poverty

gap for the country would be the sum, across all households that are below the income threshold,

of all the individual fuel poverty gaps.

Note that this definition of the fuel poverty gap makes it possible (in theory, at least) for a

household to be classified as fuel-poor, but for its fuel poverty gap to be zero. This would occur if a

low-income household living in a thermally poor dwelling has access to energy at a very low unit

cost. Although apparently anomalous, this situation does not necessarily present a problem. In the

unlikely event of these circumstances occurring, such households should still be considered as

priorities for attention, because they are unlikely to be either capable or motivated financially to

improve the thermal efficiency of their dwelling.

The recommended fuel poverty definitions are summarised in Figures 3 and 4 below, which

illustrate the process by which the fuel poverty status and the fuel poverty gap for a single

household are determined.

Figure 3 Schematic illustrating process for determining fuel poverty status of a household

26

The deemed energy cost represents the cost of attaining a standard level of comfort. It is calculated based on the floor area and thermal characteristics of the dwelling, and the actual price paid for energy.

21

Figure 4 Schematic illustrating the process for calculating the fuel poverty gap of a single

low-income household

3.2. Energy efficiency obligations and white certificates

Background

The new EU Directive on Energy Efficiency entered into force in December 2012. Article 7 of the

Directive requires Member States to establish obligatory energy efficiency schemes, with the

obligated parties being designated from energy distributors and suppliers. However, Paragraph 9

of Article 7 allows Member States to opt for one or more alternative schemes instead of an energy

efficiency obligation, providing such alternative schemes can be demonstrated to be as effective in

meeting the specified energy savings targets. While the Directive acknowledges that an EU-wide

system of trading obligations should not yet be introduced, it does allow for the possibility of

Member States introducing national ‘white certificate’ schemes, under which obligated parties

could meet their obligation by “buying” the energy savings achieved by others.

There is potential for such schemes to form an important part of a toolkit of policies to combat fuel

poverty. This is recognised in the Directive on Energy Efficiency, which allows Member States to

include elements in their obligation schemes that have a social objective. One of the longest

established energy efficiency obligation schemes, that of the UK, has for many years included a

requirement for obligated parties to achieve a specified fraction of their energy savings among

‘priority groups’ – mainly the elderly and those in receipt of certain means-tested benefits.

However, as well as potentially contributing towards the fight against fuel poverty, such schemes

may have negative consequences on the situation of vulnerable groups, if the way that the costs

are passed through is not given sufficient thought.

22

International experience27

Several countries have a significant amount of experience in operating energy efficiency

obligations schemes, either with or without a white certificate component. The most thoroughly

documented examples are UK, Italy and France – Table 1 below presents a comparison of the

main features of the schemes in those countries. A brief narrative description of those schemes, as

well as examples from other countries is presented in the sections that follow.

United Kingdom

As mentioned above, one of the longest-established energy efficiency obligation schemes is that in

the UK. This has been running under various manifestations since 1994, when the ‘Energy

Efficiency Standards of Performance’ (EESoP) scheme was introduced. Since then, the scheme

has evolved first into the Energy Efficiency Commitment (EEC) in 2002, and then into the Carbon

Emissions Reduction Target (CERT) in 2008. Since 2002, the obligated parties have been

permitted to trade their obligations, but because these trades must be approved individually by the

Regulator, neither EEC nor CERT are considered to be true white certificate schemes.

Throughout this evolution, the scale of the scheme has grown steadily; the target savings under

the first cycle of EESoP were about 6TWh over four years, while the second cycle of EEC

obligated savings of 130TWh over three years. CERT obligations are expressed in terms of CO2

savings, but are equivalent to about 64TWh annually.

Table 1 Comparison of the main features of energy efficiency obligation schemes in UK, Italy and France

United Kingdom Italy France

Obligated parties Electricity and gas suppliers with more than 50,000 customers

28

Electricity and gas distribution companies with more than 50,000 customers

All suppliers of electricity, gas, domestic fuel, heat and cooling supplying more than 0.4TWh per year (or 5,000 litres of domestic fuel)

Number of obligated parties

6 30 2,56029

Total size of obligation

185 Mt CO2 over the originally planned three-year duration, increased to 293 Mt CO2 when the scheme was extended by an additional 21 months

54 TWh over three years 18 TWh per year

27

Unless otherwise stated, the information in this section is drawn from one of the following sources: Staniaszek and Lees (2012), Giraudet and Finon (2011), Giraudet et al (2011), di Santo et al (2011), Lees (2010), Bertoldi and Rezessy (2009)

28 This was the threshold size from 2005 until the originally planned end-date for CERT in March 2011,

when it was increased to 250,000 29

Note that, despite the very large number of obligated parties, over 80% of the total obligation is carried by just two companies

23



Eligible parties30

Obligated parties only Obligated parties and any companies owned by or linked with them, distribution companies with less than 50,000 customers, energy service companies, large end-user companies with an energy manager.

Obligated parties plus local authorities and social housing providers

Eligible measures Energy efficiency measures in the residential sector only, from an approved list of 37 standardised measures. Since March 2011, the distribution of CFLs has ceased to be eligible.

Measures in any end-use sector, from an illustrative list of 22 measures, which includes energy efficiency measures as well as some supply-side measures such as cogen, SWH and solar PVs. Minimum size threshold depending on: (i) whether savings are deemed, estimated or monitored; (ii) whether measure is implemented by obligated party or eligible party.

Energy efficiency measures in any end-use sector, from a list of 170 standardised measures. Installations that are covered by the EU Emissions Trading System are excluded.

Trading of obligations

Only with regulator approval – trading volume negligible

Open market – 75% of certificates issued are traded

Open market, but only about 4% of certificates are actually traded

Sanctions for non-compliance

At the discretion of the regulator, related to size of non-compliance. Possibly be as high as 10% of turnover

Determined by the regulator, taking into account several factors such as the size of the non-compliance, the number of white certificates available and the state of affairs of the company

Fixed penalty of €20 per MWh. Note that, because paying the penalty discharges the obligation, this is effectively a ceiling price for white certificates

Cost recovery Full cost pass-through to customers

Distributors are regulated monopolies, so a fixed cost of per toe saved is specified each year that is permitted to be passed through to customers in the distribution charge. This has ranged from €89-100 per toe saved.

Fuel oil – liberalised market, so full cost pass through to customers.

Gas and electricity – regulated tariff, so no cost pass through

Estimated cost of scheme

Not known, as obligated parties are not required to divulge costs. Estimated at £3.2 billion over the originally planned three-

year lifetime of CERT31

Estimated €216 million cost to obligated parties only

Approx. €2.02 billion over three years total cost to all parties

30

Eligible parties are those that are permitted to generate accredited savings. 31

DECC (2009)

24



Fuel poverty component

Originally 50% (later revised down to 40%) of the obligated savings must be achieved in ‘priority groups’. From March 2011, a new ‘super priority’ group was defined, consisting of the most vulnerable households, among whom at least 15% of the obligated savings must be achieved.

None None

The measures installed under CERT up to its originally planned end-date of March 2012 can be

summarised as follows32:

1.9 million cavity wall insulations

2.6 million lofts professionally insulated

86 million m2 of DIY loft insulation

45,000 solid wall insulations

303 million CFLs distributed

82,000 households switching from electric to efficient gas heating

7,000 heat pumps

3,000 solar water heaters

About 63% of the total energy savings accredited came from insulation measures, but it is notable

that the number of solid wall insulations was very low, despite the huge number of homes in the

UK that have solid walls. Also, given that there are only about 26 million households in the UK, it is

questionable how many of the CFLs distributed are actually generating carbon savings by being in

use.

From October 2009, an additional obligation known as the Community Energy Savings Programme

(CESP) has been placed on the six obligated parties that are covered by CERT, as well as on the

four major independent power generation companies. CESP specifically targets geographical

areas where there are a high proportion of low-income households, with delivery through

community-based partnerships. It was conceived with the additional purpose of generating

knowledge that could inform the design of future programmes, particularly in regard to promoting

solid wall insulation.

CESP obligations are expressed in terms of a points score, where the points are awarded to the

obligated energy companies for the actual emissions reduction achieved, with additional points (so-

called 'uplift' factors) being awarded for: (i) the comprehensiveness with which target geographical

areas are covered; (ii) the implementation of more than one measure in a household (so promoting

a 'whole house' approach). Setting the targets in this way has made it impossible to state exactly

what level of CO2 emission reduction the CESP obligation corresponds to, as an energy company

might decide to fulfil its obligation through a relatively smaller emission reduction but a very high

uplift factor, or vice versa. It was estimated during the consultation phase of CESP that actual CO2

32

Ofgem (2012). The totals include measures carried forward from the earlier EEC.

25

savings would amount to about 3.9 Mt.

CERT and CESP finished at the end of 2012, at which time they were replaced by the Energy

Company Obligation (ECO) scheme. A more detailed description of ECO is provided in Annex 4,

but since it has only just come into operation, it is impossible to judge its likely results.

Italy

Italy’s white certificates scheme, known as Titoli di Eficienza Energetica (TEE) commenced in

2005. The obligated parties are operators of local and regional electricity and gas distribution

networks. The scheme is therefore unusual in having obligated parties that do not have any direct

contact with end-users. It is perhaps for this reason that TEE has the widest scope of eligible

parties of any of the schemes examined here, and also why the liquidity in the white certificate

market is very high.

Energy savings obligations must be achieved each year, although savings achieved in the three

years prior to the start of the scheme were eligible. All savings achieved under TEE are accredited

for fixed terms of five years (except insulation, for which the lifetime is eight years) with no

discounting. This very short lifetime over which savings can be accredited accounts for the fact that

insulation measures have been almost ignored under TEE, while the distribution of CFLs was

dominant until they were removed from the list of eligible measures.

Despite the fact that TEE savings may be achieved in any end-use sector as well as in limited

supply-side spheres, it is estimated that 86% of implemented measures were in the residential

sector. As a consequence, the use of deemed savings as the methodology for evaluating savings

has dominated. For measures evaluated using a deemed savings approach, the minimum project

size is 25 toe. The minimum size threshold rises to 100 toe for projects evaluated using

engineering estimates, and 200 toe for projects that require customised monitoring plans.

During 2007-08, about 80% of the white certificates issued were for measures implemented by

about 140 eligible non-obligated parties. There is an active trade in white certificates, including a

spot market. During 2007, the total volume of certificates traded was 136% of the obligated amount

of energy savings, with over one-third of the total trade taking place on the spot market

France

Certificats d’économies d’énergie (CEE) scheme has been in operation since 2006, and places an

obligation on all suppliers of energy for end-use including, from 2011, suppliers of transport fuel.

Originally, third parties were eligible to generate white certificates through energy saving initiatives,

although non-obligated eligible parties were not able to gain accredited savings from projects that

increased their turnover. Since 2009, third party eligibility has been limited to local authorities and

social housing providers.

Measures supplied through normal retail outlets are not eligible for accredited savings, which at

least partially explains the minor role played in CEE by CFL distribution relative to the UK and Italy.

Nevertheless, 87% of accredited measures are implemented in residential sector, with heating

systems (mainly efficient boilers and heat pumps) accounting for the greatest share.

Obligations have to be met cumulatively over the compliance period (3 years) rather than annually.

The lifetime over which savings are evaluated is based on the technical lifetime of the measure –

up to 35 years for insulation. Future savings are discounted at a rate of 4%.

Denmark

The Danish energy efficiency obligation scheme has been operating in its current form since 2006.

It covers distributors of electricity, oil and gas as well as all district heat companies, with over 200

obligated companies in total. Originally, only the district heat companies had a legal obligation – for

26

the electricity, gas and oil distributors, the commitment was a voluntary agreement. Currently,

however, the obligation is legally binding on all except heating oil distributors. There are no non-

obligated eligible parties, but obligated parties are not allowed to implement projects directly, so

they operate in partnership with third parties (which may sometimes be daughter companies).

Savings may be claimed for measures in any end-use sector apart from transport. No supply-side

or network-related measures are eligible. The scheme is unusual in permitting measures that are

purely behavioural, although these are not commonly undertaken because the transaction costs

are high relative to the size of the savings that can be claimed.

Targets must be met annually, with some provision for carrying forward excess savings into the

following year. The current target is approximately 5.4PJ.

Until 2011, an important feature of the Danish scheme was that savings were accredited for a

single year only – i.e. only savings achieved in first year of measure are counted. The positive

effect of this was that obligated parties had to generate a continual pipeline of new initiatives.

However, it had the negative effect of discriminating against measures with a longer payback

period, such as insulation. Since 2011, the scheme has moved over to accrediting savings over the

lifetime of the measure. However, a series of ‘uplift factors’ applied to different lifetime bands still

have the effect of favouring shorter lifetime measures.

It is perhaps for this reason that, relative to the schemes in UK, Italy and France, a much higher

proportion of measures implemented are in the industrial sector. Only 42% of measures are

implemented in the residential sector, so the deemed savings methodology for quantifying savings

is less important than project-specific engineering methodologies. However, there are over 200

standardised measures for which ex-ante values for savings are used.

The penalty for non-compliance is related to amount by which targets are missed, but with the

additional possibility of distributors losing their license. There is a full pass-through of costs to the

final consumer, charged per kWh. The current charge amounts to about €₵0.06 / kWh.

Flanders

The scheme operating in the Flemish part of Belgium places an obligation on electricity

distributors, who may claim savings from measures implemented in the residential sector, as well

as in non energy-intensive industries and the service sector. The target of 0.58TWh annual savings

must be met every year, and implemented measures are evaluated only over a single year. There

is no trading of obligations, and a fixed penalty for non-compliance of €10/MWh, which cannot be

passed through to consumers. The amount of cost recovery permitted is fixed in advance based on

budgets submitted by distributors to the Flemish government, who administer the scheme.

Almost 60% of measures are implemented in the residential sector, and the Flemish scheme is the

only one outside the UK where a specified fraction of the obligated energy savings have to be

achieved in low-income households. Actions must always consist of a financial contribution and an

awareness raising component. The most common measure in Flanders include super-insulated

glazing, high-efficiency boilers, roof insulation, thermostatic radiator valves and solar water

heaters.

Key issues to address

The experiences of other countries in operating energy efficiency obligation and white certificate

schemes provide a number of useful lessons that can inform the design of such a scheme in

Romania. This section examines some of the key issues that must be addressed, focusing

particularly on those aspects that have a particular bearing on fuel poverty.

27

Obligated and eligible parties

The most basic question that must be addressed in designing an energy efficiency obligation

scheme is who should be the obligated parties. The schemes examined in the previous section

differ widely in this regard, with the UK and France placing the obligation on energy supply

companies, while the other countries opted to obligate energy distribution companies. Obligating

energy supply companies would at first sight appear to be preferable, as they have a direct

relationship with the end-users on whose premises the energy saving measures are implemented.

However, in practice, even the obligated supply companies generally operate indirectly through

third-parties, so this distinction is perhaps less significant than it may at first seem.

Existing schemes also differ widely with regard to defining which non-obligated parties are eligible

to earn white certificates by implementing energy saving measures. In the UK and Denmark, no

non-obligated parties are eligible, whereas TEE in Italy define a very wide range of eligible parties.

It is not clear from the available evidence whether the scope of parties that are eligible under a

scheme has a significant impact on the scheme’s success. It is likely, however, that broadening the

number of eligible parties would tend to reduce the overall cost of compliance. This supposition is

supported by the fact that the total costs to the obligated parties were much higher in the UK

(where there are no non-obligated eligible parties) relative to France and Italy33. However, these

figures are not evidence of a causal connection.

Eligible measures and evaluation lifetimes

The tightest restriction on what measures are eligible for meeting obligations is in the UK, where

only residential sector projects are permitted. However, even in Italy and France, where such as

restriction does not apply, that vase majority of implemented measures are in the residential

sector. This is probably because those transaction costs associated with quantifying savings are

almost eliminated, as residential sector measures are generally standardised offerings where an

ex-ante calculation of ‘deemed savings’ is provided.

The Flanders scheme and, until 2011, the Danish scheme, both allowed savings to be counted

only in the first year of implementation. TEE in Italy limits the lifetime over which savings may be

counted to five years, or eight years in the case of insulation. The CEE in France, and the UK

scheme before 2008, required future savings to be discounted, while the current Danish scheme

applies ‘uplift factors’ that give greater weight to shorter lifetime measures. It is only the current

CERT scheme in the UK that allows undiscounted savings over the full technical lifetime of

measures to be counted towards obligations.

Rules restricting the period over which savings may be counted, or requiring future savings to be

discounted, have the effect of making measures with a long payback period less favourable.

However, they are justifiable on the grounds of additionality as it is extremely unlikely that, for

example, a building would have remained uninsulated for the next 30 years under a business as

usual scenario. In many cases (and specifically in Romania) it is exactly the measures with longer

payback periods that are needed, and which instruments such as energy efficiency obligation

schemes should be aiming to encourage. Deciding what is the appropriate lifetime over which

savings may be counted, and whether to require discounting, may therefore require a trade-off

between a scheme that is economically efficient and one that achieves the desired outcomes.

Cumulative versus annual targets

CERT in the UK and CEE in France set targets that must be achieved cumulatively over a three-

year obligation period. All the other schemes examined have targets that must be met annually. An

advantage of cumulative target, particularly for a newly introduced scheme, is that it provides

33

The total costs to obligated parties over a three-year period were €6.66/MWh in the UK, €1.12/MWh in Italy and €3.89/MWh in France (Giraudet et al, 2011).

28

obligated parties with the time they need to plan their approach and to develop relationships with

third parties. However, TEE in Italy achieved the same effect by setting a series of annual targets

that started low but ramped up rapidly as the obligated parties gained experience. The advantage

of annual targets is that they allow the scheme administrator to make more frequent fine

adjustments to the parameters of the scheme.

Associated with the question of targets is the issue of banking – that of carrying forward excess

savings from one obligation period into the next. This would seem to be very desirable, as it

encourages obligated parties to over-achieve. If banking is not allowed, this may lead to a situation

where obligated parties achieve their target well before the end of the obligation period and simply

stop implementing measures. This is likely to have an undesirable impact on the energy efficiency

industry players through which the obligated parties act. In fact, this was a criticism of the earlier

predecessors to CERT in the UK, which provided the insulation industry with a very significant

fraction of their total business.

Tradable certificates

Obligations are tradable to a certain degree in the schemes in UK, Italy and France, although it is

only in Italy that the volume of trade is significant. Whether or not an obligation scheme also

incorporates tradable certificates would not seem to be a critical factor in the success of the

scheme. However, in situations where the number of eligible parties is very large relative to the

number of obligated parties (as in Italy), some form of tradable certificate system is clearly

necessary.

Cost recovery and distributional impacts

The costs incurred by obligated parties in implementing an obligation scheme must be covered in

some way, and the method of cost-recovery is very important with respect to fuel poverty.

However, as gas and electricity retail markets move towards being fully deregulated, it becomes

increasingly difficult for the administrators of an energy efficiency obligation scheme to have any

control over how the costs are recovered. In the UK, this has made it impossible even to know

what the costs of the scheme are, because this information is treated as commercially confidential

by the obligated parties.

Energy bills tend to make up a larger proportion of the expenditure of low-income households

compared to the population in general. Because of this, a fixed per-kWh additional charge added to

all energy bills to cover the costs of implementing an obligation scheme has a much greater effect

on low-income households than it does on the population as a whole. This is illustrated in Figure 5

below, which shows the overall impact of the UK’s renewable energy and energy efficiency

obligation schemes projected forward to 2020.

For households that receive energy saving measures, energy bills in all income groups are

reduced, because the saving in energy costs though the implemented measure is greater than the

cost passed through. However, taking all households together, the net impact on bills is positive,

and the increase in bills suffered by the lowest income groups is greatest. This is exacerbated still

further if one considers only households that have not benefited from energy saving measures

under the obligation scheme. It is estimated that, by 2020, households in the lowest income decile

who have not received measures will face an increase in their energy bills amounting to 2% of

income.

29

Figure 5 Impact of energy efficiency and renewable energy obligation schemes on

domestic energy bills, by income decile. (Source: DECC, 2010)

In a fully deregulated energy retail market, the extent to which the rules of an obligation scheme

can be used to address regressive distributional impacts is very limited. One option is to require

obligated parties to target a certain amount of savings at low-income groups, as is the case in the

UK and Flanders. However, bearing mind that the projections shown in Figure 5 already take into

account this targeting, it is clear that the setting of low-income ‘quotas’ in this way is not sufficient

to offset the distributional impact.

A more effective way of reducing the cost of such schemes to low-income households would be to

promote the use of binomial tariffs, along with a direct subsidy to low-income households of the

fixed portion of their bills. This is explored in more detail in the section ‘Binomial Tariffs’ below.

Targeting of low-income households

The requirement to target a particular amount of effort in an obligation scheme towards low-income

households has been a feature of UK schemes since they started in the 1990s. It was introduced

specifically to counter the adverse distributional impact of the first Energy Efficiency Standards of

Performance (EESoP) scheme – an impact that was even greater than with the current CERT,

because EESoP was funded by a fixed amount (rather than a per-kWh charge) levied on every

customer. More recently, the UK has developed a strategy to tackle fuel poverty, and has

positioned CERT as a component of this strategy.

From the end of 2012, CERT will finish, to be replaced by the ‘Energy Company Obligation’ (ECO).

But at the same time, the UK government’s main fuel poverty initiative (Warm Front34) will also end,

without any replacement scheme. An even greater burden of addressing fuel poverty will therefore

fall on ECO, yet the regressive nature of its cost recovery does not appear to have been

addressed.

Of course, there are other reasons apart from addressing regressive distributional impacts for

requiring obligated parties to preferentially target low-income households. Such targeting is

justifiable on the grounds of additionality (see below) – the requirement that interventions have to

34

It is worth noting that Warm Front was funded from general taxation, so its distributional impact was much more equitable.

30

demonstrate that they have gone significantly beyond what would have happened under business-

as-usual. Low-income households tend to face the biggest barriers to action (not only financial, but

also informational), so any measures they receive under an obligation scheme are more likely to

go beyond business-as-usual than would be the case for high-income households.

Only the UK and Flanders have included a requirement to target low-income groups in their

obligation schemes, and in both cases this is achieved through a ‘quota’ specifying the fraction of

savings that have to be achieved in the target group. However, there are other possible

approaches to achieving the same result. One approach might be to allow an uplift factor to be

applied to measures implemented among specific groups. The advantage of this is that it could be

used to fine-tune the scheme to ensure that it addressed the depth of the ‘fuel poverty gap’. This

would be achieved by applying a higher uplift factor to households that are deep in fuel poverty.

Targeting of priority groups could also be achieved indirectly, by applying uplift factors to measures

that are likely to more applicable to low-income households. For example, the fuel-poor live

predominantly in buildings that are inadequately insulated, so applying an uplift factor to buildings

insulation would tend to result in a greater fraction of effort being directed to the fuel poor.

Additionality

The principle of additionality requires that any measures implemented that count towards an

energy efficiency obligation must go beyond what would have been expected under a business-as-

usual scenario.

Generally speaking, the baseline against which additionality is assessed is the relevant national

regulation (e.g. building regulations, in the case of thermal efficiency measures). However, in some

cases a ‘softer’ baseline is used – for example, boiler replacements in France use the average

efficiency of the existing stock as a baseline. In Italy, additionality in appliance-related measures is

assessed relative to the average efficiency of appliances sold. In the UK, the preferred approach to

dealing with additionality is to build into the targets an allowance for ‘dead weight’ – that is, the

number of recipients of measures who would have implemented them even in the absence of the

obligation scheme.

As described above, preferentially targeting low-income households can be justified on the

grounds of additionality, since they are less likely than higher-income households to implement

energy saving measures under a business as usual scenario. However, some features of existing

schemes are somewhat dubious when examined purely under the criterion of additionality. For

example, the very long lifetimes over which savings can be claimed that are permitted for some

measures in the UK would only be consistent with additionality if it could be shown that those

measures would not be implemented over the whole lifetime without the obligation scheme. This is

clearly very questionable in the case of buildings insulation, for which the lifetime is 40 years.

However, the need to overcome barriers to the installation of buildings insulation in the UK was

acute, so allowing such a long lifetime has allowed these barriers to be overcome. It is therefore

clear that, although additionality is a very important principle, if it is too rigidly adhered to, an

obligation scheme may not deliver the desired outcomes.

Rebound

It is frequently observed that the energy savings actually achieved from an energy efficiency

improvement are less than expected. This is because the beneficiary increases their demand for

the energy service in question as a result of its effective cost having fallen – a phenomenon known

as rebound, or take-back. The most obvious example of this is where a household installs more

lighting because the cost of operating a CFL is so much lower than for an incandescent lamp.

Where fuel poverty is widespread, there may be significant suppressed demand, in the form of

31

homes that are inadequately heated because the occupants cannot afford their energy bills.

Improvements to the thermal efficiency of such homes may not yield any energy savings (i.e. 100%

rebound) because the improvement merely allows the household to achieve an adequate level of

comfort with the same energy consumption. Such extreme examples of rebound are rare, but

some empirical studies in the UK and Austria have suggested that rebound rates may be as high

as 30% for thermal improvements in buildings35.

The only energy efficiency obligation scheme that takes rebound effects into account is the UK

CERT scheme (and its predecessors). The deemed savings attributed to buildings insulation

measures are credited at a rate 15% less than modelling results would suggest they are worth, to

reflect the evidence that rebound is greater for insulation projects than for other measures. No

distinction is made between different income groups, despite the fact that rebound is likely to be

much greater among low-income households.


Article 7 of the new Directive on Energy Efficiency sets out the rules that require Member States to

introduce an energy efficiency obligation scheme, which may or may not contain a tradable

certificate component. In fact, the Directive allows Member States to opt for alternatives to an

energy efficiency obligation scheme, providing these alternative schemes are able to achieve

energy savings among end-users that are at least as great as the target savings outlined in

Paragraph 1 of Article 7. However, the timescale within which alternative schemes would need to

be formulated and reported to the Commission is very short.

Clearly the detailed design of a full energy efficiency obligation scheme (or an alternative system of

measures) is a massive undertaking, far beyond the scope of this project. This section therefore

contains recommendations about the broad design features that would ensure that such a system

contributes to, rather than conflicting with, efforts to tackle fuel poverty. Many important parameters

of an obligation scheme or alternative schemes can only be finalised after extensive consultation

with the parties in question. As part of the UNDP / GEF project’s on-going efforts to facilitate such

consultation, a Roundtable event was held in December 2012 that included key stakeholders from

ANRE, the Ministries of Economy and of the Environment, energy supply and distribution

companies, consumer groups and regional environmental associations.

The views expressed at the Roundtable suggested that the energy supply and distribution

companies do not currently have sufficient capacity (either financially or managerially) to take on a

fully-fledged energy efficiency obligation scheme at present. The general consensus was that

Romania should adopt a combination of alternative measures initially.

However, an obligation scheme of modest size need not place an undue burden, financially or

otherwise, on obligated parties, particularly if the full cost of implementing such a scheme is

permitted to be passed through to the final consumers. Of course, this then raises the concern that

many householders themselves are unable to bear any additional costs, but these costs could be

offset in the case of low-income households by countervailing measures. For example, in a

binomial tariff system, the costs of an obligation scheme would appear in the fixed portion of the

tariff, which could then be subsidised for those on low-incomes. A requirement for obligated parties

to target a particular fraction of the effort at low-income households could also help to ensure that

the costs of an obligation scheme to vulnerable groups are more than offset by the benefits they

receive.

To the extent that an obligation scheme of very limited scale may therefore be appropriate for

Romania, some lessons regarding its design can be taken from international experience. The

35

Bertoldi and Rezessy (2008)

32

original EESoP scheme in the UK (see above) provides a promising model for an obligation

scheme with modest beginnings that has the potential to be ramped up in scale as the obligated

parties gain experience with implementing energy efficiency programmes. In its original form,

EESoP cost only £1 per household per year – an amount that did not impose a significant burden

even on the most fuel-poor households. By mandating a fixed level of expenditure, the obligation

scheme was designed to be fully transparent in terms of cost. Obligated parties were then set

targets for the level of energy savings that they were required to achieve with the permitted

expenditure.

With regard to (non-obligated) eligible parties, there would appear to be advantages to including a

wide range of players. Eligible parties should include local authorities and residents associations,

both of whom would be well placed to facilitate the implementation of thermal rehabilitation projects

in residential buildings.

In order to ensure that much-needed building insulation is an attractive measure under an

obligation scheme, it is recommended that the lifetimes over which savings may be claimed are

based on technical lifetimes, with no discounting (as in the UK). Although this runs counter to the

principle of additionality, any other methodology would make building insulation less attractive, and

limit the extent to which the obligation scheme aligns with efforts to cut fuel poverty.

A full discussion on which sectors should be eligible for energy savings under an obligation

scheme is beyond the scope of this project. However, there would seem to be a strong case for

allowing measures implemented in the heating supply sector to count towards obligated parties’

targets. Within the residential sector, it is recommended that a set of ‘uplift factors’ are defined for

different measures, to allow the administrator of an obligation scheme to selectively ‘steer’ effort in

the required direction. In a scheme where targets are required to be met annually, these uplift

factors could provide a way of fine-tuning the scheme with great precision.

As described above, the preferential targeting of effort at low-income groups is justifiable both on

the grounds of additionality and as a means of redressing the regressive distributional impact of

cost pass-through. This is probably best achieved by applying an uplift factor for savings achieved

in low-income groups. Such uplift factors could be tiered, giving even greater weight to measures

implemented in the very poorest households. It is also recommended that obligated parties be

required to report on the fuel-poverty impacts of the interventions they have made under the

obligation.

The experience of the UK shows that preferential targeting alone is unlikely to be sufficient to fully

compensate for the negative distributional impacts of an obligation scheme. It is therefore

recommended that the use of binomial tariffs is promoted (see below), allowing the fixed portion of

the bills of low-income households to be subsidised.

Although rebound is likely to be significant among low-income households, particularly for

measures that improve the thermal efficiency of dwellings, it is not recommended that the

calculated values for deemed savings attempt to compensate for this. To do so would count

against building insulation measures, and reduce the potential benefit to low-income households of

an obligation scheme.

3.3. Binomial tariffs

Some aspects of the design of an energy efficiency obligation / white certificate scheme can help

to ensure that fuel poverty goals are addressed, such as requiring obligated parties to target a

certain fraction of their efforts at low-income sections of the population. However, in a situation

where energy markets are becoming increasingly deregulated, it becomes impossible to control

how obligated parties pass on the cost of an energy efficiency obligation scheme to their

33

customers. For example, in the absence of any evidence to the contrary, it is assumed that the

costs of the UK’s CERT scheme are distributed among customers on a per-kWh basis, which

means that a relatively higher fraction of the costs fall on lower income sections of the population.

The previous section has highlighted evidence from the UK suggesting that including a

requirement to preferentially target low-income groups under an obligation scheme is insufficient to

redress this distributional effect.

A potential solution would be to directly subsidise the costs of such schemes that are passed on to

the bills of low-income households. However, where a simple monomial tariff is in operation,

subsidising energy bills weakens the price signal to improve energy efficiency. This would not be

the case, however, if bills were calculated on the basis of a binomial tariff and the subsidy applied

to the fixed component of the bill. The general consensus at the UNDP / GEF National Roundtable

in December 2012 was that serious consideration should be given to introducing a system of

binomial tariffs in Romania.

All else being equal, the introduction of a simple binomial tariff for energy would be expected to

deepen fuel poverty. This is because the fixed portion of the bill represents a proportionally much

greater fraction of a low energy bill, and low-income groups are more likely to be low consumers of

energy. However, this impact could be offset by ensuring that any social welfare schemes to assist

with energy bills are always applied to the fixed portion only.

Of course, as energy markets liberalise, suppliers will to a large extent be free to define their own

tariff structures, so a situation where a binomial tariff is universal is unlikely. There is also a

possibility that tariffs may be introduced that do not fit neatly into the normal monomial-binomial

distinction. The usual depiction of a binomial tariff is of a fixed portion that is paid even if

consumption is zero, plus a per-unit tariff that is somewhat lower than that paid under the

monomial system. The result is that customers consuming less than a certain threshold level will

pay more under a binomial system, whereas heavier consumers would pay more under a

monomial system.

However, tariff structures may be somewhat more complex. For example, in the UK there are no

truly monomial tariffs (defined as being where there is no fixed charge and where the unit price is

constant for all consumption levels). Figure 6 below illustrates two for the common gas tariff offered

by Southern Electric – both are effectively binomial, but only one has a truly fixed portion (known

as the ‘standing charge’). But because the ‘No standing charge’ tariff charges such a high rate for

the first 625 kWh consumed in any quarter, the effect is that consumers on the tariff with a fixed

charge (the ‘Standard’ tariff) actually pay less if their consumption is below a certain threshold.

34

Figure 6 Quarterly gas bill versus consumption for two common tariffs of the same

supplier in the UK (Source: Southern Electric website and gas bills)

Although customers in a liberalised energy market would be free to choose which tariff they are

charged, the promise of having the fixed portion of energy bills subsidised would provide a strong

incentive for low-income households to switch to a normal binomial tariff, if the option is available.

In order to ensure that any energy subsidies directed at low income households can be applied to

fixed costs, thereby retaining appropriate price signals for efficiency improvements, it would be

necessary to require all energy retailers to offer at least one binomial tariff with a fixed portion, that

is available to all customers.

Applying a subsidy to the fixed portion of an energy bill that is based on a binomial tariff is more

rational economically than subsidising a bill based on a monomial tariff, because consumption per

se is not being subsidised. However, in the case of the current heat aid payments being made to

low-income households in Romania, switching from the current system to one based purely on

subsidising the fixed portion of a binomial bill would not be feasible. Data collected during the PPG

phase of the current project36 indicates that the cost structures of Romania’s heating companies

are such that the fixed portion of their costs is much lower than typical heat aid payments. In other

words, shifting to a fully binomial heat tariff and fully subsidising the fixed component of the heat

bills of low-income households would provide such households with a much lower level of subsidy

than they currently receive37. This would remain the case even where energy efficiency

interventions had substantially reduced the amount of heat consumed. Of course, this does not

mean that heat tariffs should not be switched to a binomial structure. It simply suggests that heat

aid payments on the variable portion of the bills of low-income households would need to remain in

place (at least for an interim period), in addition to subsidies of the fixed portions.

3.4. Grants and loan schemes

Article 7, Paragraph 9(b) of the EU Energy Efficiency Directive mentions “financing schemes and

36

UNDP (2011) 37

Own calculations based on available estimates of the fixed and variable costs of heating companies.

35

instruments...” as a possible alternative policy measure to the introduction of an energy efficiency

obligation scheme. It is not clear whether a system of direct grants towards energy efficiency

investments would fall within the scope of measures envisaged as being acceptable alternatives to

an obligation scheme under the Directive. However, in practice almost every loan scheme across

the EU that has ever been introduced to facilitate energy efficiency investment has included a

significant grant component. In particular, if a loan scheme is to address the needs of the fuel-poor,

it must almost inevitably be accompanied by a targeted grant element.

International experience

The EU Directives on the Internal Markets for Electricity and Gas require Member States to put in

place “adequate safeguards to protect vulnerable customers”. Although these Directives suggest

that such safeguards might take the form of measures to improve the energy efficiency of housing,

this is not mandatory38. While the majority of EU countries have programmes to promote energy

efficiency in housing, usually in the form of grants or soft loans, only in the UK and Ireland are

housing energy efficiency schemes specifically identified as part of a strategy to combat fuel

poverty (although in several other countries schemes make special provision for low-income

households).

The following sections summarise the main programmes that exist in EU countries for promoting

improvements in the energy efficiency of residential buildings through grants, subsidies and loan

schemes, but which fall outside the auspices of energy company obligation schemes.

Austria

At the national level, €100 million per year until 2014 has been allocated to provide grants of up to

30% of the investment costs for the thermal improvement of buildings, including both residential

and non-residential. An energy performance certificate (EPC) must be obtained both before and

after the refurbishment in order to qualify for a grant.

At the provincial level, most Länder offer grants and / or soft loans for energy efficiency retrofits of

residential buildings. Loan interest rates are typically between 1-4%, while grants are usually for

10-25% of the total cost. This assistance is again only available if an EPC is obtained before and

after retrofitting, and some Länder also require awareness-raising activities to be undertaken to

explain the purpose and meaning of the EPC to the building owners / users.

Bulgaria

Since the beginning of 2011, a total of €80 million has been made available from the European

Regional Development Fund to support energy efficiency improvements in residential buildings.

This amount is sufficient to renovate about 600 concrete panel blocks. Between 2005-10, the

European Bank for Reconstruction and Development provided a household energy efficiency credit

line of €45 million for on-lending by local banks in the form of soft loans. Combined with €7 million

of grants of up to 20% from the Kozloduy Decommissioning Fund, these loans supported almost

29,000 energy efficiency retrofits, resulting in annual energy savings of 219 TWh.

Estonia

Twenty-year loans at an interest rate of 4.8% fixed for 10 years are available for improvements to

the energy efficiency of apartment blocks. Loans are made to housing associations from a fund

totalling €46 million provided by the European Regional Development Fund and the Council of

38

In fact, the majority of Member States have opted for non-economic protection for vulnerable customers, generally in the form of protection against disconnection in the event of arrears on energy bills. Only twelve countries provide any kind of economic support for vulnerable customers, such as special tariffs for certain defined groups, or direct cash assistance with energy bills (ERGEG, 2009).

36

Europe Development Bank, with Estonia being the first country to use EU Structural Funds to

support the renovation of apartment buildings39. Following a mandatory energy audit, loans can be

used to finance measures that lead to an improvement in energy efficiency of 20% for buildings up

to 2,000 m2, or a 30% improvement for larger buildings. Loans are secured against the stream of

energy savings, rather than the building itself40. In its first two years (2009-11), 252 apartment

blocks have received loans totalling €20 million, resulting in average energy savings of 33%.

Grants are available of 50% of the cost of energy audits for residential buildings, and guarantees

are also available for up to 75% of the loan amount for investments in improving the energy

efficiency of apartment buildings. A Green Investment Scheme funded from the sale of €30 million

of AAUs to Luxembourg provides grants and low-interest loans of up to 35% of the cost of the cost

of energy efficiency improvements in housing. Six grants totalling €42,000 were made in 2010.

Spain

Subsidies of up to 22% of the investment cost are available for energy efficiency improvements to

buildings that result in a reduction of energy consumption of greater than 20%. The available

subsidy rises to 27% of the cost if the building is improved up to a 'B' rating, and to 35% of the

investment cost if an 'A' rating is achieved.

Finland

Grants of 10-15% of investment cost are provided to housing companies undertaking energy

efficiency renovations of residential buildings, including switching to wood-fired heating systems.

Grants of up to 25% of the cost of the materials required for energy efficient renovation are also

available for low-income households. Householders may also offset against their personal tax

liability the cost of employing contractors (but not the material) to undertake energy efficiency

improvements to their home.

France

The Zero-Percent Eco Loan is available for a range of energy efficiency improvements to homes,

and the installation of efficient heating systems. The loan is only available for packages that

including at least two measures, for which the maximum loan amount is €20,000, rising to €30,000

for a package of three or more measures.

Germany

In Germany, thermal improvements to apartment blocks have been supported for many years

under the KfW Energy Efficient Rehabilitation Programme (see Annex 2). This uses government

funding to the tune of €1.4 billion annually, blended with finance raised on the international

markets, to provide soft loans for energy efficiency improvements to residential buildings. A

particularly notable feature of the programme is the very favourable terms of the loans provided,

which may be for up to 30 years, with interest rates of under 2% and also a grace period. The

programme also includes features that promote a ‘whole house’ approach, to avoid funds being

used merely to ‘cherry pick’ those interventions with a rapid payback.

Croatia

The Environmental Protection and Energy Efficiency Fund has been used to co-finance energy

efficiency improvement projects in households and public buildings. Up to 40% of the total

investment cost can be provided from the fund, in the form of a zero-interest loan for 7 years with a

2 year grace period (maximum €190,000) or a subsidised interest loan of up to €108,000 at a rate

of 2% below the market rate. Between 2004 and 2011, a total of almost €20 million from the fund

39

Davies and Holmes (2011) 40

Rezessi and Bertoldi (2010)

37

was invested in 301 energy efficiency projects41.

Hungary

Residential buildings of concrete panel construction are eligible to receive grants of between 30%

and 60% of investment costs for energy efficiency improvements. Refurbished apartment blocks

must obtain an energy certificate and achieve a 'D' rating to qualify for the lowest level of support,

with the highest level being available only for refurbishments that achieve an 'A+' rating. Most

refurbishments achieved a 'B' rating. From 2009, the funds for this scheme were provided from a

Green Investment Scheme, funded mainly from sales of AAUs mainly to Belgium and Spain. As of

March 2011, over €50 million had been disbursed or contracted under the programme42.

A second phase of the 'panel programme' described above is now in operation – the “Climate

Friendly Home Panel Sub-Programme”. This is one of two sub-programmes for residential building

refurbishment currently supported by the Green Investment Scheme, the other being a similar

programme for residential buildings of 'traditional' (i.e. not concrete panel) construction (the

“Climate Friendly Home Energy Efficiency Sub-Programme”)43. These two sub-programmes

between them have been funded to the tune of about €50 million. The Green Investment Scheme

also supports programmes for efficient lighting and efficient household appliances, targeted at

vulnerable households.

Ireland

Three grant schemes have targeted the residential sector in recent years. The Better Energy

Homes Scheme (formerly the Home Energy Saving Scheme) offers fixed grants for a range of

energy efficiency measures on homes built before 2006. Since 2010, householders wishing to avail

themselves of these grants have been obliged to carry out a Building Energy Rating assessment

after the works have been completed. It is estimated that a total of 64,000 homes have received

grants under this scheme, 46,000 of which were in 2010.

The Warmer Homes Scheme targets low-income and vulnerable households, engaging local

community-based organisations to undertake energy efficiency improvements and provide advice.

Since 2000, this scheme has assisted over 60,000 homes. This scheme and Better Energy Homes

have now been brought together under the new National Retrofit Programme.

The Greener Homes Scheme previously provided grants to households installing renewables-

based heating systems, but this scheme is now closed44. A total of 32,000 installations received

support under this scheme since 2006.

Italy

A tax credit of 55% of the total investment cost (up to a maximum of €60,000) is given for a range

of building energy efficiency measures, including the retrofit of existing buildings. The tax credit is

payable over ten years in equal instalments. Between 2007 to 2010, this facility supported the

renovation of 2 million flats (7.7% of the country's total) across 840,000 individual projects. The

interventions are estimated to have employed an average of 42,000 people, and saved about

6,500 GWh annually.

Lithuania

Funds from the European JESSICA initiative have been used in Lithuania to create a source of

grants and soft loans to support the Programme for Refurbishment of Multi-Family Buildings (see

Annex 3). Grants from the state budget are available to cover half of the cost of project

41

Domac (2011) 42

Ministry of National Development (2011) 43

Czakó (2012) 44

Sustainable Energy Authority of Ireland website www.seai.ie (accessed 23 April 2012)

38

development, and up to 15% of the project investment cost. Soft loans from the fund are available

to finance the rest of the project cost, at a fixed interest rate of 3% for 20 years and a grace period

of 2 years. The scheme provides a good example of a redesign (at the time when JESSICA funds

became available) that has enabled scarce state budget resources to be used in a more efficient

and targeted way. In its original pre-JESSICSA form, the grants provided were unduly generous

and the scheme had to be suspended because its funds were depleted.

Latvia

Grants of up to 50% of total investment costs are provided to housing associations that have

implemented energy efficiency retrofits to multi-apartment buildings achieving energy savings of

greater than 20%. The total fund available amounts to €63 million. Between 2008-12, the Latvian

government also allocated €9 million to the thermal improvement of 56 social housing buildings. A

Green Investment Scheme with funds of €50 million per year currently supports a number of

activities including energy efficiency improvements to public buildings. This scheme is due to finish

in 2012.

Poland

The Thermo-Modernisation Fund will repay up to 25% of loans taken out to finance energy

efficiency improvements to residential or public buildings. The fund will also support projects to

replace fossil-fuelled building heating systems with renewables-based systems. To be eligible,

projects have to demonstrate, by means of an energy audit, that the energy savings achieved will

exceed specified thresholds. These range from a 10% saving for projects involving only the

modernisation of a heating system up to a 25% saving for projects involving both building envelope

measures and heating system renovation. Payments from the Fund are made directly to the

commercial bank financing the project, subject to the conditions that the loan amount is no greater

than 80% of the total project cost, for a period of not more than 10 years and that loan repayments

do not exceed the energy cost savings achieved by the project.

United Kingdom

From 2000 until 2012, the Warm Front grants scheme (see Annex 1) has been the central pillar of

government efforts to reduce fuel poverty. The scheme provided taxpayer-funded grants directly to

vulnerable households for improvements to the thermal efficiency of the home and / or upgrades to

old, inefficient heating systems. The Warm Front scheme closed for new applications in January

2013, after which the combination of the new Energy Company Obligation and the Green Deal

(see Annex 4) became the main schemes for promoting energy efficiency among residential end-

users.

Of these two schemes, only the Energy Company Obligation is expressly targeted at combating

fuel poverty. The Green Deal is a loan scheme, but loans are expected to be provided at market

rates, making it somewhat unusual among the energy efficiency loan schemes described in this

section. The feature that distinguishes Green Deal from a commercial loan is that the responsibility

for repayment resides with the property rather than with the individual, with repayments being

added to the electricity bill for the property. It remains to be seen whether this feature is sufficient

to persuade householders to make energy efficiency investments that they would not otherwise

have made.

Cost-effectiveness and targeting

The Project Document for this project states that a primary motivating factor for the implementation

of energy efficiency in existing buildings is to improve the fiscal position of the Government, by

decreasing the level of subsidy required from the State to protect poorer households. The

implication of this is that if grants are to be used for stimulating investment in energy efficiency

39

improvements, the total amount of grant provided should not exceed that which is currently

allocated to paying heat subsidies to lower-income households.

The experience of the pre-JESSICA programme for renovating multifamily blocks in Lithuania

illustrates the extent to which the use of over-generous grants to incentivise energy efficiency

investments can rapidly exhaust the available funds (see Annex 3). Because the use of pure grants

is a relatively inefficient way to use limited funds, it therefore seems likely that an initiative that

combines both grant and loan components would achieve a greater impact per unit of spend. The

loan component would be targeted mainly at able-to-pay households, thereby freeing up more

grant funds to be targeted at poorer households.

Germany's KfW Programme has included both loan and grant components for some time, while

Lithuania is also now moving in that direction with the JESSICA fund. The UK's recently launched

Green Deal scheme also in effect combines loan and grant components, since it is designed to

operate alongside the Energy Company Obligation (ECO). In the case of KfW and JESSICA, the

grant component is used to incentivise deeper savings, while in the case of Green Deal / ECO and

also with JESSICA, the grant component provides support for low-income households who might

not otherwise access the loan scheme.

In order to derive a clearer picture of the trade-off between the precision with which assistance can

be targeted through grants, versus their relative inefficiency in terms of impact per unit spend, a

simple model was developed to test the effects of a number of different grant-loan combinations

under a range of scenarios. The model and the results obtained are described in Annex 5.

Sensitivity to interest rates

The interest rate paid by householders participating in loan-based energy efficiency schemes

differs widely, from only 1% for the KfW Programme in Germany to an expected 6-8% for Green

Deal in the UK. Even without taking into account the generous grace periods offered under the

KfW Programme, and the possibility of receiving some of the loan amount back as a grant, the

lower interest rate hugely increases the range of measures that are financially attractive.

Adopting the concept of the 'golden rule' from the UK’s Green Deal programme, an energy

efficiency measure can be considered financially attractive when financed by a loan if the loan

repayments are less than the energy savings that result. Assuming a loan period of 25 years, if a

loan was available at 0% interest, then clearly any energy efficiency measure with a simple

payback period of less than 25 years would pass the golden rule. At higher interest rates, the

simple payback period required to pass the golden rule with a 25-year loan is shorter. Figure 7

shows the effect of increasing interest rate on required payback period for a range of interest rates.

40

At an interest rate of 1%, as currently paid by participants in the KfW Programme, all measures

with a simple payback period of less than 22 years would pass the golden rule with a loan period of

25 years. At the other extreme, if the interest rate reaches 8% (the upper end of the range of rates

expected under Green Deal), only measures with a simple payback period of less than 10.7 years

would meet the golden rule with a 25 year loan. This would be likely to exclude a wide range of

deeper energy efficiency measures such as external insulation of walls.

Thus, unless the interest rate offered under a loan scheme can be kept low, many energy

efficiency measures could only be implemented if the participating household is willing to commit to

repayments that exceed the energy cost savings. While this might not present a problem for

relatively well-off households, it is unreasonable to expect households already suffering fuel

poverty to participate in a programme that leaves them cash-negative. Under this scenario,

subsidies could be used to assist low-income households in making loan repayments.

A balance therefore needs to be struck between two possible uses of government funds.

Subsidising interest rates can help to ensure that a wide range of energy efficiency measures meet

the condition that loan repayments are lower than energy savings, while subsidising the loan

repayments of low income households allows these households to make energy efficiency

investments at market interest rates without pushing them deeper into poverty. A number of

different scenarios of targeted subsidies combined with soft loans are explored in some simple

models described in Annex 5.


There can be no doubt that the poor thermal performance of a large fraction of the housing stock in

Romania imposes a severe burden on many lower-income households. The solution of investing in

thermal rehabilitation of dwellings is unaffordable for many, and in any case, it is not attractive as

an investment because energy bills are subsidised in an effort to alleviate the financial burden they

impose. There is an urgent need for a transition away from subsidies on energy consumption,

towards subsidies for energy efficiency.

Subsidies for energy efficiency are currently provided through the thermal rehabilitation

0% 1% 2% 3% 4% 5% 6% 7% 8%

0.0

5.0

10.0

15.0

20.0

25.0

Interest rate

Cu

t-o

ff s

imp

le p

ayb

ack p

eri

od

Figure 7 Effect of interest rate on the range of investments for which energy savings

exceed repayments on a 25-year loan

41

programme, but the design of the scheme means that its distributional impact is very regressive

because all households are expected to make the same contribution to the cost of rehabilitation

regardless of their income. Furthermore, the size of the grant provided by national government,

even to higher-income households, means the scheme has a relatively poor impact per unit of

government expenditure.

Addressing some of the shortcomings of the current thermal rehabilitation scheme could be

achieved by a system of more carefully targeted grants for low-income households. But this would

run the risk of leaving middle-income households, who would no longer qualify for such generous

grants, in a position where investing in thermal rehabilitation would become unaffordable. This

indicates the need for a loan scheme to address the needs of those households.

Under the recommendations made to the IWG in June was a suggestion that a Green Investment

Scheme could be established, with one of its targets being investments in energy efficiency in

buildings. While the detailed specification of a Green Investment Scheme is beyond the scope of

this report, the simple model described in Annex 5 illustrates some of the parameters that a loans

made under a Green Investment Scheme would need to have in order to combine with

appropriately targeted grants to facilitate the transition away from subsidised energy consumption.

The model results demonstrate that it is possible to apply a combination of targeted grants and soft

loans in such a way that the thermal rehabilitation of dwellings represents a financially attractive

proposition for all income groups, even where the thermal rehabilitation is combined with a

reduction in the level of supply-side and / or demand-side energy subsidies. Furthermore, the

model suggests that these results could be achieved at considerably less cost to the state budget

than that of the current thermal rehabilitation programme. Meanwhile, the lessons that can be

learned from international experience provide some pointers as to how those targeted grant and

loan schemes should operate.

The first recommendation is that the contributions to the cost of thermal rehabilitation currently met

by local and national government are targeted more precisely at the ‘unable to pay’. For the very

lowest income households, this might mean that the householder would not be expected to make

any contribution from their own resources, or at most only 5% of the total investment cost.

Meanwhile, higher income households would be expected to make a much greater contribution

than at present.

In order to ensure that the bigger contributions expected from households on higher incomes are

affordable, it is recommended that the targeted grants scheme is complemented by a financing

scheme that provides soft loans for energy efficiency improvements. These loans would be

provided only for projects that adopt a ‘whole house’ approach that would necessarily include

thermal insulation of the building fabric. Based on the simple model explored here, and on

international experience, the scheme should aim to provide loans at interest rates of 2% over 20

years, possibly with a grace period. Providing a grace period during which no loan repayments are

required would allow the phase-out of energy consumption subsidies to begin, without imposing

too great a burden on the finances of low-income households.

The schemes described have the potential to integrate very smoothly with any future energy

efficiency obligation scheme. Obligated parties could intervene in a number of areas in such a way

that they could legitimately claim credit for a share of the energy savings achieved. This might

include simply contributing to a portion of the investment cost, covering the cost of project design

for non-standard building rehabilitation projects, or covering the cost of the loan repayments of low-

income households that the model depicted as being covered by the local authority under the heat

aid scheme.

Much of the complexity of the up-coming Green Deal scheme in the UK appears to result from

42

attempts to overcome one particular perceived barrier – that property prices fail to reflect

adequately the true value of energy efficiency improvements. It is for this reason that the scheme is

designed such that the obligation to repay Green Deal finance is tied to the property, rather than

the individual, so that a householder can recover the cost of an energy efficiency improvement in

the event that they move out.

Of course, the introduction of a system of Energy Performance Certificates would ensure that the

value of energy efficiency improvements could be reflected in property prices, thereby addressing

this perceived difficulty. Until such time as an EPC system is operational, it is recommended that

the need for the complexities described above is avoided in Romania by keeping a centralised

database of dwellings that have received professionally installed thermal rehabilitation under any of

the schemes described. If necessary, householders occupying such dwellings could be issued with

a certificate as evidence that the work has taken place, in the event that they wish to sell the

property.

3.5. Other measures

Paragraph 9 of Article 7 of the Energy Efficiency Directive describes a number of possible

alternatives to an energy efficiency obligation scheme that Member States may adopt. However,

the wording of the Directive makes it clear that the measures described are suggestions, rather

than a prescriptive list. The purpose of this report is not to undertake a full evaluation of all possible

measures that could be taken in fulfilment of Article 7, but rather to examine how such measures

could be designed to be consistent with the objective of alleviating fuel poverty. With the exception

of the measures described in the previous sections, none of the alternatives measures listed would

be likely to have a significant impact on the extent or depth of fuel poverty. For this reason, these

measures will not be examined here.

43

4. SUMMARY OF RECOMMENDATIONS

4.1. Definition of fuel poverty

A definition of fuel poverty should be adopted based on the ‘low income, high energy costs’

principle.

The low income threshold should be set at 60% of median household income, with

equivalisation used if the available data allows.

Two indicators should be used to identify high energy costs – either non-availability of

reasonably prices energy sources or a dwelling with poor thermal performance should

indicate high energy costs.

The energy price threshold should be set at such a level that, were an average household

living in a reasonably thermally efficient dwelling to pay such a price, their energy costs

would amount to 10% of their income. Preliminary calculations suggest that such a level

would be about 260 lei/MWh.

The thermal performance threshold should be set at a level corresponding to best-

performing unrehabilitated pre-1990 buildings, namely about 140 kWh/m2 annual energy

consumption.

4.2. Energy efficiency obligation / white certificate scheme

District heating companies should not be included as obligated parties initially, as it is

unlikely that have the financial strength.

During its initial phase, the obligation should take the form of a target level of energy

savings to be achieved at a fixed level of expenditure, with the cost being passed

transparently through to the final consumer as a fixed additional sum on the energy bill.

As wide a range as possible of non-obligated eligible parties should be defined, which

should include local authorities and resident’s associations.

The lifetimes over which the energy savings of measures can be counted should be based

on technical lifetimes, and future savings should not be discounted.

Obligated parties should be required to meet targets annually, with the size of the target

being scaled up during the initial years.

Measures in the heating supply sector should be eligible under the obligation scheme.

A series of uplift factors should be defined for different measures, allowing effort to be

steered in the desired direction by the scheme administrator.

Uplift factors should also be applied to measures implemented in low-income households,

to encourage the direction of effort towards the fuel-poor.

Obligated parties should be required to report on the fuel-poverty impacts of the measures

that have implemented.

Calculated values of deemed savings to apply to standardised measures should not

attempt to take into account rebound effects.

4.3. Binomial tariff

All retailers of gas, electricity and heat should be obliged to offer at least one binomial tariff

that contains a fixed component.

A direct subsidy of the fixed portion of the energy bills of low-income households on a

binomial tariff should be provided to compensate for the costs of any energy efficiency

obligations placed on energy suppliers

44

The current schedule of heat aid payments should be reformulated such that the fixed

portion of the bills of low-income households is subsidised. Only where this is insufficient to

alleviate the financial situation of the lowest-income households should an additional

subsidy be applied to the variable portion of the bill.

4.4. Grants and soft loan schemes

The current thermal rehabilitation scheme should be redesigned so that the required

householder contribution is dependent on household income.

State budget funds should be partially redirected away from contributions towards the up-

front costs of thermal rehabilitation, towards the creation of a fund to provide soft loans to

householders investing in thermal rehabilitation.

Remaining contributions provided from state funds to the cost of thermal rehabilitation

should be more precisely targeted at households with the lowest incomes. Likewise,

contributions to thermal rehabilitation from local authorities should be targeted more

towards lower-income households.

Heat aid payments to households that have benefited from thermal rehabilitation should be

scaled back in such a way that low-income households are not left in a significantly worse

financial position than previously, taking into account any obligations they may have to

make repayments through a soft loan scheme.

Targeted grants / soft loan schemes should be integrated with any future energy efficiency

obligation placed on utilities, to allow obligated parties to intervene and gain credit for

energy savings achieved in thermal rehabilitation of residential buildings.

45

ANNEX 1 – WARM FRONT (UNITED KINGDOM – ENGLAND)

Description:

The Warm Front scheme as described here operates in England, but very similar schemes are in

operation in all countries of the United Kingdom. It has been in operation since 2000 (prior to 2005,

it was known as the Home Energy Efficiency Scheme) and will operate until 2012/13. Warm Front

is a taxpayer-funded scheme that provides grants to vulnerable households to improve the thermal

properties of homes and / or replace old and inefficient heating systems. Because it is taxpayer

funded, the burden of paying for the scheme falls relatively fairly on all sections of the population,

in contrast to the supplier obligation schemes such as CERT and the new Energy Company

Obligation.

The annual programme budget has fallen in the last years of the scheme, from £345 million in

financial year 2010/11 to £100 million in 2012/13. Along with the similar schemes in Scotland,

Wales and Northern Ireland, Warm Front has been the main national initiative expressly aimed at

tackling fuel poverty. It is scheduled to be discontinued in 2013, at which time the Energy Company

Obligation will take over this role.

In common with many programmes that aim to reach vulnerable groups, Warm Front is prone to

the difficulty that the target group is also likely to be the least aware of the scheme's existence. To

counter this tendency, Warm Front operates in partnership with a range of organisations that

identify eligible households are refer them to the scheme. These partners include health sector

bodies, the social services sector, charities focusing on the elderly and people with disabilities,

private landlords' associations and organisations working with ethnic minority communities.

Another particularly effective feature of Warm Front has been the provision of free 'benefit

entitlement checks' to all applicants. The receipt of certain welfare benefits is the main criterion to

determine eligibility for Warm Front assistance, but in many cases households do not claim the full

range of benefits to which they are entitled. By providing a benefit entitlement check, not only does

Warm Front improve its reach, it also brings an additional direct cash benefit to many households.

In the year ending March 2011, about 32,000 checks were conducted under Warm Front in

England, which identified an average per household of almost £1,900 annually in unclaimed

welfare benefits. In 19% of households receiving benefit entitlement checks, claiming these

additional benefits also allowed otherwise ineligible households to access assistance under Warm

Front45.

During financial year 2010/11, demand for the scheme was such that the budget was exhausted by

December 2010 and the scheme was closed for new applications. This increased demand was

probably partly due to winter weather conditions arriving exceptionally early for the second

successive year. It may also have been due to increased pressure on energy companies to deliver

on their CERT obligations, through partnerships with Warm Front, by the original scheduled CERT

reporting date of March 2011.

Following the announcement that the budget for Warm Front would be severely curtailed from

2011 onwards, a consultation was held to determine how best to target the reduced funding. The

result of the review was that, although there were no significant changes in the delivery structure,

some elements will be cut. Compact fluorescent lamps would no longer be provided, and benefit

entitlement checks will no longer be offered (households will instead be referred to other services

that offer benefits advice). Most importantly, the scheme would be more precisely targeted at the

most vulnerable households by tightening the qualifying criteria. For the first time, the thermal

performance of the dwelling would be used as a criterion for eligibility.

45

DECC (2011a)

46

Results:

As of March 2011, Warm Front (and its predecessor) has provided assistance to 2.3 million

households, or 11% of all households in England. A total of 2.8 million measures were installed,

including 720,000 loft insulations, 580,000 draughtproofings, 490,000 cavity wall insulations and

450,000 boiler replacements. It was estimated that each of the 128,000 households receiving

assistance during 2010/11 would reduce its annual energy costs by an average of £61046.

The design of the scheme is simple, and has been relatively stable for a long period, so it has

provided a reliable stimulus for the energy efficiency industry. However, its impact on fuel poverty

is questionable, mainly as a result of poor targeting. A 2009 audit found that the majority of

households qualifying for assistance under the scheme were not fuel-poor, and the majority of fuel-

poor households would not qualify for support under the scheme. Of course, this apparent poor

targeting is as much a reflection on the inappropriateness of the UK’s current fuel poverty indicator

as it is on the design of Warm Front.

Strengths and Weaknesses:

Simplicity and continuity – the scheme is simple in design, easily accessible and

comprehensible to its intended target groups. Its long duration with few changes to its

design parameters means that it has provided a reliable stimulus to the development of the

supply chain for insulation materials and services.

Poor targeting – various estimates have suggested that the scheme was imprecise in its

targeting of the fuel-poor. For example, a National Audit Office evaluation in 2009 found

that 75% of households that would qualify for the scheme were not fuel-poor, but

conversely 57% of fuel-poor households would not qualify if they were to apply. This poor

targeting was addressed through changes in the eligibility criteria made in early 2011, but

no evaluations are available to assess whether these changes have been effective.

Formation of partnerships – the delivery of Warm Front involved a huge range of national

and local partner organisations, including the health sector, social services, NGOs, local

authorities and many others. This will help to ensure that the seriousness of fuel poverty is

much more widely recognised, and tackling it is not seen as an issue only for the energy

sector.

Progressive cost recovery – because the scheme is funded out of general taxation, the cost

pass-through is progressive (i.e. those who are intended to benefit from the scheme pay

proportionately much less of its costs).

Inappropriate performance metric – given that the scheme forms a pillar of the UK

government effort to combat fuel poverty, it is somewhat surprising that the scheme does

not use a performance indicator that tracks the number of households lifted out of fuel

poverty. Instead, the reporting tracks the number of households assisted, with no reference

to whether the assistance provided is sufficient to affect the recipients' fuel-poor status.

46

DECC (2011a)

47

ANNEX 2 – KFW ENERGY EFFICIENT REHABILITATION

PROGRAMME (GERMANY)

Description:

Various similar programmes have been operated by KfW Bank in Germany since 1996. In its

current manifestation, it is known as the Energy Efficient Rehabilitation Programme. The

programme provides financial support, in the form of soft loans or grants, to technical interventions

aimed at improving the energy efficiency of existing residential buildings. This includes not only

family homes but also hostels, nursing homes and homes for the elderly. The programme is

operated by a partnership between the Federal Ministry of Transport, Buildings and Urban Affairs

and the state-owned KfW bank. The Federal budget support for the programme was €1.4 billion

annually as of 2011, up from about €218 million in 2001.

KfW blends finance raised on the international markets with government funding to offer loans with

low and fixed interest rates, long maturities (sometimes as long as 30 years), grace periods during

which no repayments are due, and no penalties for early repayments. Loans are usually provided

through the borrower's own bank, and are secured against the borrower's property – generally as a

'second lien' if the property is already security against a mortgage. Assuming the total loan-to-value

(mortgage plus KfW loan) does not exceed 1, the KfW loan is adequately secured.

Typical loan conditions towards the end of the CO2 Building Rehabilitation Programme were an

interest rate of 1.4% for a 20 year loan with a 3 year grace period, or 1.7% for a 30 year loan with a

5 year grace period47. Under its current manifestation, the Energy Efficient Building Rehabilitation

Programme offers interest rates that depend on the level of the carbon reductions projected, with a

typical rate of 1% fixed for 10 years for a refurbishment that brings the building up to a standard

corresponding to a specific energy consumption of 15% higher than the 'Efficiency House' level,

which is the standard for new buildings48.

An important feature of the programme is the 'repayment bonus', which is a portion of the loan

amount that is refunded to the borrower as a grant, if the thermal performance of the building after

refurbishment exceeds certain benchmark values. This grant level is determined by the level of

specific energy consumption achieved in relation to the Efficiency House standard. Grant amounts

range from 7.5% of the investment cost for achieving 115% of the Efficiency House standard, up to

a maximum of 17.5% of the investment cost for refurbishments that achieve a specific energy

consumption of 55% of the Efficiency House standard.

As the programme has evolved over through its three manifestations, the criteria for packaging of

individual measures has changed. Under the original CO2 Reduction Programme, the criteria were

quite loose, with the result that most investment was made in single measures yielding the highest

rates of return. With the realisation that opportunities for deeper carbon reductions were being

missed, the CO2 Building Rehabilitation Programme adopted a 'whole house' approach, providing

loans only for specific packages of measures. Under the current Energy Efficient Rehabilitation

Programme, the whole-house approach is still emphasised, but support at a less generous level is

available for implementing single measures in recognition of the fact that packages of combined

measures are not always appropriate (for example, where a building has already been partially

refurbished)49.

47

Schweizer-Ries (2009) 48

The 'Efficiency House' standard corresponds to a specific energy consumption of 55-94 kWh/m2 annually,

with the actual value within that range being determined by geometry, orientation and location. 49

However, due to excessively high demand, support for individual measures has been suspended since September 2010 (Schettler-Köhler and Kunkel, 2011)

48

Results:

The CO2 Reduction Programme resulted in 685,000 homes with a total floor area of 57 million m2

being treated between 1996 and 2004. The programme was responsible for the creation of 16,400

jobs annually (figures for the period 1996-2000).

The CO2 Building Rehabilitation Programme is estimated to have resulted in the refurbishment of

about 1 million existing homes between 2006 and 2009. A total of 894,000 jobs were created by

the KfW programmes over the same period, but this figure includes jobs created under the 'new-

build' programme as well as those created under the rehabilitation programme. It has been

estimated that €5 worth of loans and €9-10 worth of investment is leveraged for every €1 of

Federal budget support to the programme, but again this is the combined figure for both the new-

build and the rehabilitation programme.


Continuity and certainty – the programme has essentially been in operation for 16 years,

with evolutionary rather than revolutionary changes in design parameters. While each

phase has incorporated the lessons learned from the previous phase, the overall character

of the programme has remained the same.

Very favourable loan terms – the combination of low interest rates with significant grace

periods means that even those energy efficiency measures with a long payback period can

be implemented without leaving households cash-negative.

'Whole house' approach – the specification of predefined packages of measures avoids

'cherry picking' of fast payback measures. Although the current manifestation of the

scheme allows single measures, the available support is less generous than for packages

of measures.

Overly strict technical standards – the technical standards that refurbishments are required

to meet have been perceived as being too stringent, which excludes many measures that

may nevertheless be extremely cost-effective. Also, the requirement for projects to be

implemented by specialised firms provides no scope for applicants to undertake any work

themselves50.

Limited to creditworthy householders – the fact that the scheme is basically loan-based

means that it is only available for householders who are willing to take on debt and are able

to pass their bank's creditworthiness checks. This tends to exclude participation by the

elderly, those with insecure tenure and other vulnerable groups. There has also been a

suggestion of a lack of enthusiasm for the programme on the part of the local banks whose

role it is to administer the loans51.

50

Schweizer-Ries (2009) 51

Schweizer-Ries (2009)

49

ANNEX 3 - MODERNISATION OF MULTI-APARTMENT BLOCKS

UNDER JESSICA (LITHUANIA)

Description:

Starting from the end of 2005, Lithuania’s Housing and Urban Development Agency (HUDA)

administered the Programme for Refurbishment of Multifamily Buildings, which was tasked with

providing support to the owners of multi-apartment blocks for implementing energy efficiency

improvements52. The specific target was apartment blocks built in the period 1961-1990, when

mass-production of blocks built from concrete panels was the norm. It is estimated that more that

about two-thirds of all Lithuanians live in such buildings53.

The energy performance of multifamily blocks was very poor, with annual heating requirements per

square metre averaging 130 kWh54. Almost 60% of Lithuanians reported being unsatisfied with the

quality of their housing. The goal of the programme was to refurbish 24,000 apartment block by

2020, accounting for over 60% of all multifamily buildings in the country.

In its original form, the programme provided a grant, payable upon completion of the works, of up

to 50% of the investment cost, depending on the level of energy efficiency achieved. The lowest

level of grant was 15% , for projects that implemented simple measures only. A 30% grant was

payable if the level of energy efficiency achieved was better – typically this level corresponded to a

30% reduction in energy use. The highest level of 50% grant required deep cuts in energy

consumption that could typically be achieved only through a comprehensive package of measures

including external insulation of walls. The programme would also pay the full cost of project

preparation including a professional energy audit. The householders would be required to

contribute at least 5% of the investment cost, with the balance of funding obtained through a

commercial bank loan.

Overall, the state budget support amounted to about 36% of the total investment costs, or about

€49,000 per project55. To achieve the original target of renovating 2,000 apartment blocks per year

would therefore cost the state budget €98 million annually. As of March 2009, a total of 307

projects were completed under the programme, with a total investment cost of €42.6 million56. A

further 83 projects costing a total of €10.3 million were partially completed, and 16 projects costing

€16.5 million had a signed agreement for work to commence. A further 313 projects with a total

cost of over €66 million had been approved and were in project preparation phase. Total state

support to the programme at that time stood at €19 million, but the total amount of support required

for the projects awaiting commencement would amount to another €84 million57.

Throughout the programme, demand had outstripped the availability of state support, but the

situation was exacerbated by the increase in the size of projects applying for support, and a more

general increase in construction costs. By early 2009, the average project cost was about

€810,000 when, only one year previously, it had been about €280,000. It was clear, however, that

the programme was well short of the refurbishment rate needed to meet the target of 24,000 blocks

by 2020.

It was in this context that funding from JESSICA (Joint European Support for Sustainable

Investment in City Areas) was secured to provide an additional impetus to the energy efficiency

52

Serbenta (2008) 53

Iržikevičiūtė (2012) 54

Vaičiunienė (2011) 55

Own calculations from data in European Investment Bank (2009) 56

Assuming an exchange rate of LTL1.00 = €0.29 57

European Investment Bank (2009)

50

refurbishment programme. JESSICA is a joint initiative between the European Commission, the

European Investment Bank and the Council of Europe Development Bank that aims to promote

sustainable development in European cities. A holding fund, managed by the European

Development Bank, has been created under the JESSICA initiative, with contributions totalling

€227 million from the European Regional Development Fund (€127 million) and the national

budget (€100 million). Further contributions of €20-40 million are expected from commercial

banks58.

The JESSICA Holding Fund provides loans to local participating banks to on-lend to owners of

apartment blocks wishing to undertake energy efficiency renovations. Loans of up to 20 years will

be provided, with an interest rate fixed at 3% for the entire duration of the loan. A grace period of

up to two years will be available during the implementation period. As of March 2011, three

participating banks had signed up. Šiaulių Bankas had received €16 million, while Swedbank and

SEB had each received €12 million59.

Under the JESSICA-funded programme, the maximum amount granted from the state budget will

be 15% of total investment costs, plus the cost of project preparation (from 2014 this available

contribution to project preparation costs will be reduced to 50%). As under the original programme,

a grant is provided upon completion of the works if certain minimum energy efficiency levels are

reached. However, unlike under the original programme where grants of up to 50% were provided,

this grant will be limited to 15% of the loan amount upon achieving a 'C' energy efficiency rating.

Under exceptional circumstances however, HUDA will provide a 100% reimbursement of loan

repayments for low-income households60. In May 2011, the government announced a temporary

(until the end of 2013) additional grant of a further 15% of the loan amount if an energy saving of

greater than 40% is achieved61.

The goal under the JESSICA-funded programme is to renovate 1,000 apartment blocks annually

until 2015. This will still be well below the rate of 2,000 per year that would be required to reach the

target of the original programme, but it represents a significant acceleration. Even if the target of

2,000 blocks were reached, the cost to the state budget will be well under half the original amount.

In fact, the programme will now aim to reach 1,000 blocks annually, so the annual cost is likely to

be well under €25 million.

Results:

The first loan agreement under the JESSICA programme was signed in November 2010, with a

homeowners' association in Panevėžys, for almost €300,000. As of April 2011, about 100 projects

had been approved, and five loan agreements worth over €1 million had been signed. It is

estimated that the annual energy saving per apartment block renovated will be 125 MWh62.


Pre-JESSICA programme:

Simplicity

Over-generous grants – it appears that the original programme consumed state budget

support at a far higher rate than envisaged, which indicates that the level of grant offered

was too high. Although no analysis appears to have been performed regarding the financial

status of the households benefiting from the programme, it is likely that a very large

proportion would fit into the 'able-to-pay' category who would not need such high levels of

58

Withana et al (2011) 59

Zabulėnas (2011) 60

Lee (2011) 61

Baltic Energy Efficiency Network website: http://www.been-online.org/Additional-support-for-refurbishment-of-multifamily-buildings-in-Lithu.504.98.html (accessed 26 April 2012)

62 Withana et al (2011)

http://www.been-online.org/Additional-support-for-refurbishment-of-multifamily-buildings-in-Lithu.504.98.html

http://www.been-online.org/Additional-support-for-refurbishment-of-multifamily-buildings-in-Lithu.504.98.html

51

subsidy.

JESSICA-supported programme:

Efficient use of state funds – the grant element for the majority of households is limited to

15%, with the rest of the investment being paid back in loan instalments to replenish the

fund. The only exception to this is the 100% subsidy available to low-income households.

The programme therefore ensures that only those who need it receive state support.

Favourable loan terms – a 20-year fixed interest loan at 3% keeps the loan repayments

low, allowing a range of longer-payback investments to remain affordable. Under these loan

terms, any investment with a simple payback period of less than about 15 years would

result in energy savings that exceeded the loan repayments63, even without taking into

account the possibility of a grant to reimburse 15% of the investment.

63

Own calculations

52

ANNEX 4 –GREEN DEAL / ENERGY COMPANY OBLIGATION

(UNITED KINGDOM)

Description64

Although Green Deal and the Energy Company Obligation (ECO) are two separate initiatives, they

were conceived jointly to be facets of an integrated framework, which came into operation at the

beginning of 2013. Green Deal is designed to provide a financing package that will encourage

'able-to-pay' households to implement energy efficiency measures that are clearly cost-effective,

while ECO is an energy efficiency obligation on energy companies65 that is designed to target both

'unable-to-pay' households as well as energy efficiency measures that may be less financially

attractive to the householder.

The key feature of Green Deal is that it allows the costs of energy efficiency improvements to be

repaid through a household's energy bill. A 'golden rule' will be applied to determine whether

proposed energy efficiency measures are eligible for financing through the Green Deal. The golden

rule states that the calculated annual energy cost savings achieved66 must exceed the annual

repayment costs (including interest), thus ensuring that any household taking up the Green Deal

will immediately be cash-positive, assuming their energy using behaviour remains unchanged.

The obligation to repay under Green Deal will reside with the property rather than with the

individual, with loan repayments appearing on their energy bills. This means if a householder

moves out, the new owner / tenant will inherit the obligation. The scheme was conceived in this

way to overcome the perceived problem of householder being deterred from making longer-term

energy efficiency improvements because they are uncertain whether they will remain in the

property to benefit from the investments made. It is proposed that the existence of a Green Deal

obligation will be disclosed to prospective future occupants through the Energy Performance

Certificate.

Households living in fuel poverty are likely to heat their homes inadequately, and their response to

any improvements in energy efficiency would be to increase their comfort level rather than reduce

their energy consumption. Energy efficiency measures that pass the Green Deal golden rule based

on assumed normal patterns of energy consumption may therefore not provide cash savings to

these households, so financing such measures under the Green Deal scheme would remain

unattractive. Furthermore, even if measures could be identified that would pass the golden rule,

low-income and vulnerable households who have had poor credit records in the past may be very

reluctant to take on any additional debt through a Green Deal scheme.

It is these 'unable-to-pay' households that the ECO scheme is designed to reach, as well as those

households where significant improvements to energy efficiency can only be achieved through

measures that do not meet the golden rule (for example, solid wall insulation). ECO is thus

designed to meet two different objectives: (i) achieving carbon emission reductions through

supporting energy efficiency improvements in 'hard-to-treat' homes (primarily those requiring solid

wall insulation); (ii) increasing the level to which vulnerable 'unable-to-pay' households are able to

heat their homes. Because of these dual objectives, ECO also has two distinct targets that

obligated energy companies must meet:

a 'carbon saving' target at a proposed level of 0.52 Mt CO2 annually by 2015

64

This information is taken from DECC (2011b) 65

At the time of the DECC Consultation in November 2011, it was proposed that the 250,000 customer threshold used for CERT would also be used to determine which energy suppliers would be bound by ECO

66 Based on an assumption of normal patterns of energy use

53

an 'affordable warmth' target of £3.4 billion reduction by 2015 in the notional67 lifetime costs of heating for low income and vulnerable households

Under the current proposed design for ECO, measures other than solid wall insulation will only be

eligible under the carbon savings target if they are included in a package with solid wall insulation.

This restriction was introduced in order to incentivise the installation of solid wall insulation in the

25% of UK homes that have solid walls, as part of a 'whole house' approach. However, some

respondents to the consultation felt that this was an unnecessary and unhelpful restriction, as it

would effectively exclude many homes from accessing ECO support (for example, those having

'hard-to-treat' cavity walls that do not meet the golden rule for accessing Green Deal)68.

It is expected that ECO and Green Deal will overlap considerably, with energy companies fulfilling

part of their ECO carbon saving obligation by working in partnership with Green Deal providers.

This might happen, for example, in situations where an energy efficiency measure requires an

additional subsidy in order to pass the golden rule criterion. The Energy Company Obligation will

be set at such a level that the annual cost of compliance is £1.3 billion69. The Green Deal scheme

will be entirely market-based and will therefore carry no cost to the taxpayer or the energy

companies.

Strengths and weaknesses:

(Note that many of the weaknesses identified here are taken from the comments made by various

stakeholders during the consultation phase. Some of these may be addressed by DECC in the final

designs of the schemes.)

Under Green Deal, the obligation to repay resides with the property, not with the individual.

This removes the barrier whereby a householder is reluctant to invest in measures with a

longer payback period than the period they are likely to remain in the property. However, it

is then vital that efforts are put into raising public awareness so that, when the occupants

who have made improvements under Green Deal move out, the existence of a Green Deal

obligation on the property is not seen as a burden by prospective new owners / tenants.

Connected with the previous point, in the event that the householder who takes out a Green

Deal agreement subsequently moves out, the new occupant will be bound by a financial

agreement that they have not themselves made. There does not appear to be any

mechanism whereby the new occupant can renegotiate the terms of the agreement, for

example if they have very different energy use patterns70.

Several respondents to the consultation process have indicated that ECO is nowhere near

ambitious enough in targeting vulnerable consumers. With the expected phase out of Warm

Front in 2013, ECO will effectively be the only remaining policy measure for tackling fuel

poverty. The DECC Consultation itself estimates that ECO will only lift between 350,000

and 550,000 households out of fuel poverty by 2022. Elsewhere in the consultation, DECC

estimates that the 'affordable warmth' part of ECO will provide assistance to 325,000

households by March 2015. But as one of the respondents to the consultation pointed out71,

'providing assistance' does not necessarily mean that all of these households will actually

be lifted out of fuel poverty. With the total number of fuel-poor households in 2011

estimated to be 4.1 million, it appears that ECO's contribution towards the government's

target of eradicating fuel poverty by 2016 will be hopelessly inadequate.

Since Green Deal finance is effectively an unsecured loan, it seems likely to be offered at

commensurate interest rates. The estimates currently being used seem mostly to be in the 67

Based on what the energy cost savings would be if the household was heated to an adequate level 68

Energy Retail Association (2012) 69

DECC (2011b) 70

CAB (2012) 71

ACE (2012)

54

range of 6-8%, at which level the number of measures that will meet the 'golden rule'

criterion will be severely limited.

Under the currently proposed design, there appears to be no compulsion for householders

accessing the Green Deal scheme to adopt a 'whole house' approach. Instead, they would

be able to cherry-pick only the most profitable measures from the recommended package.

At a time of economic uncertainty when many households are struggling to reduce their

debt burden, they are likely to be very reluctant to take on additional debt. Also, during a

consultation with householders, some expressed the feeling that it was risky to commit to

paying for a technology for the next 20 or 25 years when that technology might rapidly

become obsolete.

The Green Deal scheme appears to be excessively complex. While allowing repayments to

be made through the energy bill appears an attractive idea, it requires a great deal of

additional administrative complexity, when a completely separate loan package (as in the

KfW Programme in Germany) would be much simpler. The additional safeguards relating to

the issue of disclosure are necessary, because the Green Deal repayment obligation

resides with the property, but this feature is itself only necessary because householders

cannot recoup their investment if they move out. But there are simpler way of achieving this

same end, for example by tying the rate of 'stamp duty'72 to the energy rating of the house,

as proposed by ACE73.

72

This is the tax that is paid on property sales. 73

Croft and Sutherland (2011)

55

ANNEX 5 – MODELLING OF ALTERNATIVE FINANCING

ARRANGEMENTS

Description of model

Section 3.4 described how a combination of targeted grants plus a soft loan scheme could achieve

an optimal balance between the conflicting targets of maximising the energy saving impact per unit

of spend and maximising the reduction in the extent and depth of fuel poverty. In order to better

understand the relative costs and benefits to different stakeholders of alternative loan-plus-grant

schemes, a simple spreadsheet-based model has been created. This model allows the main

features of alternative schemes to be explored. It is, however, important to emphasise that the

model described here is not designed to provide detailed costings for different schemes – rather,

its purpose is to reveal in relative terms how the costs and benefits of different schemes are

distributed.

Under each set of scenarios, it is assumed that a hypothetical typical apartment block undergoes

thermal rehabilitation, resulting in a reduction in heating costs for all apartments. The thermal

rehabilitation is financed according to one of four arrangements and, for each set of scenarios, the

financial costs and benefits of the four different financial arrangements are assessed relative to a

base-case where no thermal rehabilitation has taken place.

The model examines, on a per-apartment basis, the costs and benefits of thermal rehabilitation

under a range of different financing arrangements. A sensitivity analysis is conducted under each

set of scenarios to examine how these costs and benefits vary according to income. The per-

apartment results are then aggregated across a hypothetical apartment block containing a total of

100 apartments with a distribution of different income levels. The aggregated results enable

average costs per apartment incurred by the local authority and the national government to be

compared.

The scenarios all include payment by the local authority of heat aid to low-income households. This

is generally according to the current schedule, except for the fourth set of scenarios where the

effect of reducing the level of heat aid payments post-rehabilitation is explored. Where the

financing arrangement involves a soft loan component, it is assumed that any heat aid payment is

made on the basis of the sum of the heat bill plus the loan repayment.

The cost to government of providing soft loans is modelled by simply calculating the grant element

of the soft finance, relative to a commercial loan. The discount rate used for evaluating public

sector cash flows (local and national government) is 5%, while private cash flows (i.e. households)

are evaluated using a discount rate of 12%.

Creating a sophisticated model that would allow all aspects of different financing schemes to be

modelled in detail is beyond the scope of this project. The model described here therefore

necessarily contains some simplifications and approximations, which should be kept in mind when

interpreting the results. The most significant simplification is the way that base-case scenarios are

currently represented. For scenarios where a supply-side subsidy is assumed, the level of this

subsidy in the base-case is assumed to stay constant for the duration of the lifetime of the analysis.

This is somewhat unrealistic, since in reality any such subsidies would be likely to be phased out in

time, even under business as usual.

For simplicity, the model also uses ‘deemed’ consumption levels, calculated purely on the basis of

the assumed specific thermal consumption, and the assumed floor area. The model does not

attempt to take into account the likely variations in actual energy consumption with income level. In

particular, the lowest income households are likely to have significant suppressed demand, and for

56

many income groups there may be some rebound. These phenomena would, in reality, result in

actual savings being somewhat lower than expected. Of course, this does not mean that the

benefits of thermal rehabilitation accruing to households are less than expected, merely that some

of these benefits would be taken in the form of increased comfort rather than cash.

The model attempts to reflect the fact that, with a monomial heat tariff, a reduction in heat demand

resulting from significant improvements in thermal efficiency of dwellings will inevitably lead to an

increase in tariff, as the heat company is forced to recoup its fixed costs across fewer units of heat

sold. However, the model assumes that any increase in tariff will happen immediately in a single

tariff increase – a somewhat unrealistic scenario, but necessary in order to keep the model simple.

Model scenarios and modelling results

The starting point for the model is a standardised energy efficiency intervention that results in a

50% saving in the specific heat consumption of a set of apartments making up a standardised

block. It is important to emphasise that the basic technical parameters for the energy efficiency

intervention remain unchanged across all of the scenarios depicted here. As a result, the overall

costs and benefits are the same for all scenarios – all that changes between scenarios is how

those costs and benefits are apportioned between the different actors. The apportioning of costs

and benefits is achieved through a number of different arrangements for financing the energy

efficiency intervention.

Alternative financing arrangements

One of the most undesirable features of the current thermal rehabilitation programme is that the

householders’ own contribution is set at a fixed level regardless of income. For low-income

households, this imposes a considerable burden and, where those households are already in

receipt of heat aid, the financial benefits of reducing their energy consumption may be relatively

small. The scheme is therefore financially very unattractive to low-income households. Conversely,

for high income households, investing in thermal rehabilitation may be both financially attractive

and easily affordable. These households could afford to pay a higher contribution than the current

rules require.

One way to overcome this shortcoming would therefore be to change the rules for the thermal

rehabilitation programme so that the contribution paid by the householder is on a sliding scale

dependent on income. The sliding scale would be structured in such a way that the average

contribution per household would be higher than under the current programme, resulting in a cost

saving for the local authority and / or the national government.

A higher householder contribution would be more easily affordable, even for middle-income

households, if it could be financed through a soft loan set at such a level that the loan repayments

are less than the energy cost savings achieved. This principle is the same as that on which the up-

coming Green Deal scheme in the UK is based, and can help to ensure that households are cash-

positive from the beginning. Although the higher household contribution would allow the

contribution of other parties to be reduced, this would be partly offset by the cost of providing soft

finance.

Based on these considerations, the following scenarios model the effects of four different financing

arrangements, including a subsidy scheme based on the current thermal rehabilitation programme

where the household contribution is fixed regardless of income. The other three arrangements are:

(i) a sliding scale subsidy where the householder contribution varies between two limits according

to income; (ii) a soft loan scheme where the householder contribution is independent of income but

financed through a soft loan; (iii) an arrangement that combines i. and ii.

57

Scenario 1 – continuing supply-side subsidy from local authority

Under the first set of scenarios, it is assumed that a supply-side subsidy is provided by the local

authority to hold retail heat prices down to affordable levels. In addition, the local authority also

provides heat aid to low-income households according to the schedule outlined in the Project

Document for this project. The base-case scenario represents the situation before the thermal

rehabilitation takes place, and all the post-rehabilitation scenarios retain both the supply-side and

heat aid subsidies at the same level.

The four financing arrangements described above are modelled with the following parameters:

Current thermal rehabilitation programme

The share contributed by all households regardless of income is 20%. The local authority

contributes 30%, while the national government contributes 50%.

Sliding scale grant

Households with a monthly income of less than 1,000 lei are required to contribute 5% of the

investment cost, while households with a monthly income of 1,600 lei must contribute 40%. The

required contribution from households with an income between these limits is on a sliding scale.

The portion of the investment cost not covered by the household is split in the proportion 80:20

between local and national government respectively.

Soft loan

Households of all income levels are required to contribute 50% of the investment cost, which is

completely covered by a loan over 20 years at an interest rate of 2%. The local authority

contributes the remaining 50%. The heat aid payments made by the local authority to low-income

households are calculated on the basis of the combined heat bill plus loan repayment.

Sliding scale grant and soft loan combined

The threshold monthly income levels for the sliding scale grant are set at 800 lei and 2,000 lei.

Households below the lower threshold are required to contribute 5% investment cost, while

households above the upper threshold are required to contribute 80%. The entire household

contribution is financed by a soft loan with the same parameters as described above. The portion

of the investment cost not covered by the household is covered entirely by the local authority. The

heat aid payments made by the local authority to low-income households are calculated on the

basis of the combined heat bill plus loan repayment.

Results

The model results for this set of scenarios are shown in Figures 8 and 9 below. From the

householder’s perspective, the financing arrangement based on the current thermal rehabilitation

programme results in a negative NPV for households with a monthly income of less than 1,000 lei,

whereas higher income households benefit from a very high positive NPV (Figure 8, left side). This

adverse distributional impact is only partly addressed by the simple soft loan scheme, which at

least pushes the NPV for the lowest income households into positive figures. It is only by applying

a sliding scale grant that the lower income households benefit from a higher NPV than their

wealthier neighbours. However, a sliding scale grant in isolation results in a slightly negative NPV

for higher income households. Although this is only slight, and would probably not be sufficient to

deter them from investing, it is addressed by combining the sliding scale grant with a soft loan

scheme. This permits a non-negative NPV to be achieved for all income groups, and distributes the

benefits in favour of lower income households.

58

Figure 8 Costs and benefits of thermal rehabilitation to different actors under Scenario 1

The graph on the right of Figure 8 shows the total discounted cost per apartment incurred by local

and national government for each of the financing arrangements. The cost to the local authority is

negative (i.e. there is a net benefit) in all cases. This benefit results because the local authority

makes huge savings in both supply-side and heat aid subsidies when heat consumption is reduced

as a result of improved efficiency. The sliding scale grant plus soft loan financing arrangement

provides the local authority with the smallest benefit, because their contribution to the total

investment cost is greater under this arrangement. However, the cost to national government of

this arrangement is only about one-seventh as great as under the current thermal rehabilitation

programme. Under this arrangement, the national government does not contribute to the

investment cost - the only cost they incur is in providing the soft finance.

Figure 9 below shows the heating bills of households in different income groups as a percentage of

income. The main point to note is that, under all financing arrangements as well as under the pre-

rehabilitation base case, bills are always less than 10% of income. This illustrates that the

combination of supply-side and heat aid subsidies is successful at keeping heating bills down to

affordable levels.

Figure 9 Heating costs as a percentage of income under Scenario 1

(note that the ‘Current thermal rehabilitation programme’ line and the ‘Sliding

59

scale grant’ line are superimposed)

Scenario 2 – elimination of supply-side subsidy

Under this set of scenarios, the supply-side subsidy is assumed to be zero both before and after

rehabilitation, while the heat aid schedule is the same as in Scenario 1. The parameters for the

different financing arrangements have been adjusted to slightly different levels under this scenario

in order to provide the desired outcomes.

Sliding scale grant

The threshold monthly income levels are set at 1,400 lei and 2,000 lei, with households below the

lower threshold contributing 5% and households above the upper threshold contributing 40%. As

under Scenario 1, the portion of the investment cost not covered by the household is split in the

proportion 80:20 between local and national government respectively.

Soft loan

As for Scenario 1, households of all income levels are required to contribute 50% of the investment

cost, which is completely covered by a loan over 20 years at an interest rate of 2%. The local

authority contributes the remaining 50%. The heat aid payments made by the local authority to low-

income households are calculated on the basis of the combined heat bill plus loan repayment.


The threshold monthly income levels for the sliding scale grant are set at 1,400 lei and 2,000 lei.




of the investment cost not covered by the household is split in the proportion 80:20 between local

and national government respectively. The heat aid payments made by the local authority to low-

income households are calculated on the basis of the combined heat bill plus loan repayment.

Results

The graph on the right of Figure 10 below indicates that, unlike under Scenario 1, the local

authority incurs a net cost for all the financing arrangements except the one corresponding to the

current thermal rehabilitation programme. Because the local authority is not providing a supply-side

subsidy even under the base case, the benefit it receives from a reduction in energy consumption

is much smaller than under Scenario 1. All three of the alternative financing arrangements cost

national government substantially less than the current thermal rehabilitation programme.

From the householders’ perspective, the picture is similar to that under Scenario 1 – the two

financing arrangements that involve a sliding scale grant have a distributional effect that favours

lower-income groups. However, the NPV for lower-middle income households is very high, at as

much as five-times their monthly income. While it would be possible to adjust the parameters of

this scenario to reduce the benefits accruing to this income group (and thereby reduce the cost to

government), it is very difficult to make adjustments that increase the NPV seen by the lowest

income groups. This is simply because, as long as heat aid payments are made under the base

case, the financial benefits resulting from energy saving will always be constrained.

60

Figure 10 Costs and benefits of thermal rehabilitation to different actors under Scenario

2

Figure 11 shows that, under the base case where there is no supply-side subsidy, the cost of

heating exceeds 10% of income for a wide range of income groups. The alternative financing

arrangements all result in much more affordable heat bills.

It is worth noting that the unsubsidised heat price being paid by households under this scenario is

280 lei/MWh, which is above the ‘reasonable price’ threshold suggested for the proposed new

definition of fuel poverty. This means that all the households with an income below the low income

threshold (60% of median income, or about 1,400 lei per month) would be defined as fuel-poor in

this scenario where there is no supply-side subsidy. This fuel-poor status is not affected by the fact

that the heat bills of the lowest income households are well below 10% of income, because of the

heat aid they receive. This illustrates the strength of the proposed new definition, as it means that a

household cannot be removed from fuel poverty simply by means of cash payments.




61

Scenario 3 – supply-side subsidy reduced relative to base case

This set of scenarios assumes a supply-side subsidy of 43% under the base case, but explores the

effect of reducing the level of this subsidy at the same time as thermal rehabilitation takes place.

The purpose is to determine the extent to which improvements in thermal efficiency allow supply-

side subsidies to be scaled back while still providing net benefits particularly to lower-income

households. The reduction depicted in this set of scenarios was from a pre-rehabilitation level of

43% down to a post-rehabilitation level of 22%. Again, the parameters for the different financing

arrangements have been adjusted to levels under this scenario that provide the desired outcomes.

Sliding scale grant


lower threshold contributing nothing and households above the upper threshold contributing 30%.

As under Scenario 1, the portion of the investment cost not covered by the household is split in the

proportion 80:20 between local and national government respectively.

Soft loan


completely covered by a loan over 20 years at an interest rate of 2%. Unlike in the previous

scenarios, the soft loan includes a three-year grace period during which no repayments are

required. The local authority contributes the remaining 60% of the investment cost not covered by

the householder. The heat aid payments made by the local authority to low-income households are

calculated on the basis of the combined heat bill plus loan repayment.


The threshold monthly income levels for the sliding scale grant are set at 800 lei and 2,000 lei.







Results

The results of modelling this set of scenarios are presented in Figures 12 and 13 below. Clearly

one of the most obvious effects of reducing the level of the supply-side subsidy at the same time

as thermal rehabilitation takes place is to greatly reduce the positive financial impact of that

rehabilitation. This can be seen in the NPVs to householders shown in Figure 12, which are

generally lower than in the previous scenarios.

Again, the distributional impacts of the two financing arrangements that use a sliding scale grant

are clear. However, without the addition of a soft loan component, the simple sliding scale grant

arrangement fails to provide higher-income households with an affordable option, resulting in a

strongly negative NPV for those households. Although the NPV of the combined sliding scale grant

plus soft loan arrangement is slightly negative for higher-income households, this represents only a

small amount relative to their monthly income, so is unlikely to adversely affect the financial

attractiveness of the arrangement.

The graph on the right of Figure 12 shows that the cost to national government of the three

alternative financing arrangements are all much lower than for the arrangement based on the

current thermal rehabilitation loan. In the case of the combined sliding scale grant plus soft loan

arrangement, the only cost to national government is that of providing the soft finance, resulting in

62

a cost per apartment that is less than one-eighth of the cost of the current programme.

Figure 12 Costs and benefits of thermal rehabilitation to different actors under Scenario 3

Despite the fact that the supply-side subsidy has been greatly reduced relative to the base-case,

the financing arrangements depicted under this scenario succeed in keeping heating bills within

affordable levels for all income groups, as shown in Figure 13 below. Of course, this is largely

because the heat aid payments are retained under this scenario, at the same levels as under the

base-case.




Scenario 4 – reduced heat aid following rehabilitation

A fourth set of scenarios was explored where the level of heat aid was reduced in the post-

rehabilitation case. Under this scenario, it is assumed that a supply-side subsidy of 20% is in place,

paid by the local authority. The aim is to explore whether any of the financing arrangements for the

energy efficient rehabilitation allow this aggressive reduction in heat subsidies to remain consistent

63

with both (i) protecting low-income groups and (ii) ensuring that the rehabilitation remains

financially attractive to all groups. The heat aid schedules used for the base-case and the post-

rehabilitation scenarios are given in Table 2 below. The level of heat aid is reduced for all income

groups except the lowest.

Table 2 Changes in heat aid schedule used under Scenario 4

Fraction of heating bill covered

Monthly income per person (lei) Base-case Post-rehabilitation

Below 155 0.9 0.9

155-210 0.8 0.7

210-260 0.7 0,55

260-310 0.6 0.4

310-355 0.5 0.2

355-425 0.4 0.1

Above 425 0 0

As with the other scenarios, the parameters for the different financing arrangements have been

adjusted to levels under this scenario that provide the desired outcomes.

Sliding scale grant


lower threshold contributing nothing and households above the upper threshold contributing 50%.

The portion of the investment cost not covered by the household is split in the proportion 90:10

between local and national government respectively.

Soft loan


completely covered by a loan over 20 years at an interest rate of 2%. The soft loan provides a

three-year grace period during which no repayments are required. The local authority contributes

the remaining 60% of the investment cost not covered by the householder. The heat aid payments

made by the local authority to low-income households are calculated on the basis of the combined

heat bill plus loan repayment.


The threshold monthly income levels for the sliding scale grant are set at 1,200 lei and 1,500 lei.







Results

The results of modelling this set of scenarios are shown in Figures 14 and 15 below. The impacts

on low-income households of the reduced heat aid schedule can be largely offset by choosing

appropriate parameters for the sliding scale grant, resulting in NPVs for all income groups that

remain positive. Without the sliding scale grant component, the NPV for low-income groups is

64

negative. Adding a soft loan component to the sliding scale grant increases the financial

attractiveness of the rehabilitation to higher-income groups, but has little impact for low-income

households. This is because the fraction of the total investment cost being covered by the lower-

income households is so low that the provision of a soft loan to finance this contribution makes little

difference. The costs to national government of all of the alternative financing arrangements are

again considerably lower than for the current thermal rehabilitation programme.

Figure 14 Costs and benefits of thermal rehabilitation to different actors under

Scenario 4

Figure 15 below presents the fraction of monthly income accounted for by heating bills for all

income groups under this set of scenarios. It can be seen that households in the middle-income

brackets have combined heat plus loan repayment bills that reach as much as 12% of income

under the two arrangements that involve soft loans. Although this would clearly represent a

problem of affordability for these households, they would not be classified as fuel-poor under the

proposed new definition. This is because their dwellings have been upgraded to a satisfactory level

of energy efficiency, and the unit price they pay for heat (taking into account the reduced supply-

side subsidy) is below the suggested ‘reasonable price’ threshold.

This final scenario is the only one modelled where there is a reduction in the level at which heat aid

payments are made. Under this scenario, the total level of payments made by the local authority to

subsidise heat consumption (that is, not including their support of loan repayments and not

including the remaining supply-side subsidy) is reduced by 57% relative to the base-case.

65




Summary of modelling results

Under every scenario, the financing arrangement based on the current thermal rehabilitation

programme generates benefits that are weighted very strongly in favour of higher-income

households. This is purely because the heat aid received by lower income households (the

threshold monthly income for a three-person household is about 1,275 lei) severely reduces the

financial impact of any energy saving that occurs. For the local authority, however, a reduction in

heat consumption among low-income households leads to a considerable financial benefit in the

form of reduced heat aid payments, as well as savings in supply-side subsidy in the scenarios

where this is present.

The alternative financing arrangements are therefore all aimed at redistributing the costs and

benefits of thermal rehabilitation in favour of low income households, but consistently with: (i)

ensuring that the investment remains attractive to households in all income groups; (ii) ensuring

that the costs to national government are kept as low as possible.

It is clear from all the scenarios modelled that the introduction of a sliding scale for the

householder’s contribution to the costs of rehabilitation is effective at ensuring that the benefits

accrue preferentially to lower-income households. However, in many cases, the greater

contribution from higher-income households that this implies renders the scheme unaffordable for

them.

Conversely, a soft loan scheme operating on its own does not have such a strong distributional

impact, and the highest NPV is still enjoyed by higher income households. A combination of the

two arrangements appears to offer the most favourable result. The use of a soft loan scheme

allows the householder contribution from high-income households to be set at a much higher level

while remaining affordable, thereby allowing the contribution from both local and national

government to be reduced further.

One of the main purposes of the modelling exercise was to identify ways in which subsidies to heat

consumption could be replaced with subsidies to energy efficiency improvements. All of the

scenarios depicted reduced the total amount of heat consumption subsidy provided, by virtue of

reducing the amount of heat consumed. However, only the last set of scenarios envisaged a

reduction in the rate of heat aid. The results showed that, in order to avoid imposing undue

hardship on the very lowest income groups, the extent to which heat aid rates can be reduced is

66

small. However, the rates can be reduced somewhat more aggressively for the income groups

towards the top end qualifying households without cancelling out the financial benefits of investing

in thermal rehabilitation, providing the appropriate financing arrangements are used.

67

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