Energy poverty at highest recorded rate
Based on one measure, recent energy inflation has increased the estimated share of households in energy poverty to 29 per cent. This leaves the share of households in energy poverty – defined as spending more than a tenth of their net income on energy (including electricity but excluding motor fuel) – above its previously recorded high of 23 per cent in 1994/95. The estimate is based on energy inflation observed from January 2021 to April 2022, with a further 25 per cent rise in energy prices increasing this share to 43 per cent.
These are among the main findings of new research on energy poverty and deprivation funded by the Community Foundation for Ireland, published today by the Economic and Social Research Institute (ESRI).
Other key findings of the report include that:
- Energy inflation between January 2021 and April 2022 increased the cost of estimated households’ consumption by €21.27 per week, on average: This rises to €38.63 per week when motor fuels are included. Should energy prices rise by a further 25 per cent, we estimate this would increase by an average of €36.57, excluding motor fuels, or €67.66 if they are included.
- There is a strong income gradient in the impact of energy price increases: we estimate that recent increases in energy costs (including motor fuels) amount to 5.9 per cent of after-tax and transfer income for the lowest-income fifth of households compared to 3.1 per cent for the highest income fifth. This is because a larger share of lower-income households’ spending is on energy, particularly home heating and electricity.
- If the objective is to protect those most affected by rising energy prices, cutting indirect taxes on energy – like VAT, fuel duty, or the carbon tax – is a poorly targeted response: about half of the aggregate gain from such tax cuts – and so cost incurred – goes to the highest-income 40 per cent of households compared to less than a third to the lowest-income 40 per cent (who have been more adversely affected by rising energy prices).
- Instead, increases to welfare payments, the fuel allowance, and even lump-sum payments like the household electricity credit are better targeted at those most affected by energy inflation: for example, a Christmas Bonus-style double welfare payment would result in gains that are larger in both cash terms and as percentage of income for lower - than for higher-income households, while avoiding blunting the incentive to invest in energy-saving technology.
Niall Farrell, one of the authors of the report, said:
“Rising energy prices are having a substantial impact on households, many of whom were already experiencing energy poverty or deprivation. Our research finds that, on average, these changes are more burdensome for lower income households, rural households and those at risk of poverty. This is because energy expenditures tend to comprise a larger share of income for these households.”
Barra Roantree, another of the authors of the report said:
“Our findings have important implications for policy. If the objective is to protect those most affected by rising energy prices, cutting indirect taxes is a poorly targeted response. This is as most of the revenue is spent compensating higher-income households who have been less affected. Furthermore, trying to address the impact of rising energy prices by cutting indirect taxes on fuel can have other undesirable effects, such as blunting the incentive to invest in energy-saving technology.”
Denise Charlton, CEO of The Community Foundation for Ireland who funded this research said:
“Many of the 5,000 voluntary, community and charitable groups we work with will be looking at this report and no doubt will reflect on it as they make pre-Budget submissions to government. The options assessed by the ESRI need urgent government attention.”