The green technologies needed to rapidly cut our greenhouse gas emissions are already on the market. What’s more, they are, or very soon will be, cost effective. In other words, from the perspective of the household, it is, overall, cheaper to go green. However, there’s a catch: access to capital is king in the household energy transition. Alex Chapman reports.
Whether it’s an electric vehicle, rooftop solar panels, a heat pump or wall insulation, they can all save you money over the long term thanks to the savings they deliver on your annual energy bills. But these benefits can only be accessed if you’ve got the cash in the bank or the ability to take out a loan (at a reasonable interest rate) to cover the sizeable up-front investment cost. Most low-income households don’t.
Affluent households, whose high incomes position them in the fifth quintile (the top 20%), are able to save almost half of their disposable income every year; by comparison, households in the bottom 20% by income operate a negative savings rate. In other words, they’ve got no capacity to save up for the capital investment required and it’s pretty likely that they’re already laden with debt. Indeed, according to Eurostat, across Europe, an estimated 7% of households are in arrears on their energy bills. At the peak of the recent energy crisis, an estimated 11% of households couldn’t afford to keep their home adequately warm, never mind affording to invest in the technologies of the green transition.
Figure 1: Household savings rate as a proportion of disposable income, broken down by household income quintile in EU-27 countries (Source: Eurostat, Median savings rate by income quintile)
These low-income households are the group most in need of cost-cutting green investments, and the least able to afford them. Not only that, but they could end up experiencing an unfair share of the costs of the transition.
Renewable electricity is cheap, but electricity system costs are rising
A defining feature of the energy transition will be a significant increase in our collective dependence on the electricity system. Rising electricity demand will be met by renewables like wind and solar, with complex variable supply. The cheap unit price of energy produced from solar and wind will partially be offset by increased system management costs, including the need to store energy for low wind and sun periods, and to balance energy supply regionally. The greater the demand placed on the energy grid, particularly during peak periods, the higher the costs of new generation and balancing will be. These costs are unlikely to hit levels anywhere near those seen during the fossil fuel–driven energy crisis of 2022-24, but they still need careful management.
If consumers shift their electricity demand to hours with an oversupply of solar and wind power, they could benefit from lower prices. This represents an opportunity for households with the capital to purchase energy storage systems such as batteries, electric vehicles (EVs) or hot water tanks (powered by heat pumps). However, not all consumers can tap into the potential of such demand-side flexibility, both because of their lack of capital and their differences in lifestyles, including working patterns (such as the much greater rates of home/hybrid working among higher-income households). Research has shown cases in which highly variable pricing schemes (such as real-time pricing and variable peak pricing) can increase energy poverty.
New technologies are entering the system via the highest-income households
In the UK, high-income households spend around seven times more than the lowest income households on new cars (see figure below). This means EVs are entering the market from the top down, and it will likely be some years before EVs permeate lower down the income spectrum. High-income households also drive significantly further, driving on average around 14,000 km per year (requiring over 2,300 kWh to power an EV) compared to just under 5,000 km among low-income households. Alongside this, higher-income households have developed a tendency to purchase inefficient car models. In the Netherlands, for instance, six of the top 10 most popular EVs were SUVs, and eight might be considered as falling into the ‘very heavy’ category. These factors can take the total power required to run a car per year over 3,000 kWh, enough to double household electricity consumption in the UK. This extraordinary increase in the electric energy demands of high-income households must be carefully considered by policy makers.
Figure 2: Average annual vehicle purchase and usage patterns by household income quintile in the UK (Source: Office for National Statistics, Family Spending Workbook and National Travel Survey)
The purchase of an EV (calculated across a vehicle’s full lifecycle) already makes financial sense for an individual household, and may improve further still as emerging vehicle-to-grid charging opportunities roll out. But a poorly managed transition, in which inefficient EVs surge onto the market and increase overall energy demand during peak demand periods, could increase costs for low-income households not benefiting from these technologies. Policy makers need to implement measures that ensure a cost-efficient grid integration of EVs, which distributes costs fairly and protects against unintended consequences. This would include measures both inside and outside the energy system.
A first issue to consider is how consumers will ultimately pay for electricity system management costs. Options include charges levied on bills (as is currently most often the case) or via general taxation; and if the former, then whether they are levied at a flat rate per household or on the variable/unit cost (i.e. per kWh of energy consumed). In the UK, system management costs are split between the fixed and variable components of the bill.
Another linked issue that policy makers must resolve is how they plan to replace current taxes on petrol with another form of driving tax based on distance or energy consumption. Most of the current focus is on so-called road pricing, or ‘pay per mile’, but other approaches could include additional levies on electricity used for driving purposes. Pending questions include how the new mechanism will incentivize responsible levels of consumption (i.e. less driving), more efficient electric vehicles and charging during low-demand periods. Additionally, there is the question of how any revenues raised might be used to compensate other users of the electricity system for any additional strain drivers create.
Learning from the fossil fuel price crisis of 2022
Lessons for how we approach green transition policy can be taken from the events of the last energy price crisis. European governments were split in their approach to supporting households. Some chose to provide universal support to households for a fixed, ‘safety net’ level of energy consumption through a ‘block tariff’ package, namely putting tight price caps on a minimum level of energy consumption required for a decent standard of living, while allowing prices above that threshold to increase. A second group of nations provided general support for all energy consumption, and attempted to provide further support to low-income households through other more targeted mechanisms. Neither approach was perfect, but there is scope for learning from this unique context.
While further research is required to understand the relative merits of these two approaches, we can see in Eurostat data that countries operating the block tariff approach had more success limiting the rise in energy poverty compared with other nations. Countries such as Croatia (+0.5 percentage points), Poland (+1.5), Greece (+1.7), Hungary (+1.8) and Austria (+2.2) all implemented a block tariff. They all outperformed the European Union average and delivered a smaller increase in the number of households unable to adequately heat their homes – this increased by 3.7 percentage points across the EU-27 countries between 2021 and 2023. There is a strong case for continuing with an approach that puts a safety net around basic levels of energy consumption through the green transition, as a back-stop against any unintended consequences of what is undoubtedly a complex and fast-paced transition.
An added advantage of the ‘basic energy’ approach (or a so-called rising block tariff) is that it can also be used to keep control of excess demand. This model sees higher levels of consumption charged at higher prices. Implemented in the context of surging EV (especially SUV) uptake among higher-income households, this model could usefully ensure that the additional strain these households place on the grid is distributed fairly between groups. Protecting essential needs and baking fairness visibly into the system represent key first tests of any transition policy.
Providing public funds and guidance to ease households’ access to capital
As well as carefully distributing costs within the energy system itself, governments will need to consider how they can remove obstacles preventing low-income households accessing capital-costly technologies and home improvements. For the lowest-income households, there will be few viable options other than to either use public funds to deliver home upgrades for energy efficiency, or regulate to require businesses to deliver such improvements. Governments will need to strike a balance between collective solutions, like community heat networks, and individual ones, and the optimal choice will depend greatly on issues such as location, natural resources and property age.
For groups with some ability to pay, models often described as ‘energy as a service’ could be useful. Switching to delivery of energy as a service means the energy retailer (either public or private) assuming upfront responsibility for the capital components in a domestic energy system (e.g. heat pumps, solar panels and, potentially, even insulation) then recouping these costs from the household by charging for the provision of energy services as a package, rather than just for energy consumption on a per-unit basis.
The energy service model is similar to models already used in communities sourcing their heat from district heat networks, and/or in solar panel subscription deals. But both of these examples also flag potential hazards to the approach. Responsible practice by service suppliers and contract holders, regulated effectively, is essential, and the risks of price extortion from relatively ‘immobile’ customers is high. For these reasons, delivery bodies involving public ownership and/or democratic oversight are likely to be preferable.
On transport, a question remains regarding when and where policy makers should put their efforts into broadening access to EVs for low- to middle-income households. In some communities, access to private cars will be essential, and options such as carpools and clubs, or leasing and sharing schemes, should all be on the table. But in most cases, the more energy- and resource-efficient options of buses, light rail and active travel are preferential. The problem of private access to capital will be avoided, and wider social and health benefits will be delivered.
The views and opinions in this article do not necessarily reflect those of Heinrich-Böll-Stiftung European Union.