Energy issues for low-income households – September 2015

Energy supply is a basic household need. People’s lighting, refrigeration, communications equipment, cooking facilities and heating and cooling all rely on it. VCOSS believes it is important to support people who face disadvantage to access reliable energy supply. If people are disconnected they can suffer adverse health and wellbeing effects, including an inability to cook, store food, heat or cool rooms, or stay in touch with the wider world.

Energy costs can also push households into financial hardship, and prevent them being able to afford other household necessities. This is most likely to happen among low-income households, who spend twice as much on electricity and gas as a proportion of their total income than middle-income households.[1] One in five low-income households cannot pay one or more bills on time in any given year, and almost one in seven have their energy disconnected.[2]

Low-income households can also face higher energy costs than others, due to issues including poor insulation and inefficient appliances. Energy retailer AGL reports that on average, Victorian customers participating in its Staying Connected hardship program use about 40 per cent more electricity a year than the average customer.[3]

With such issues in mind, here is a VCOSS rundown of what’s been happening around energy policy issues over the last few months.

Inquiry into energy retailers’ hardship programs

The Victorian Government launched the Inquiry into the financial hardship arrangements of energy retailers in response to widespread community concern about sharply rising rates of energy disconnections, especially wrongful disconnections. Information on the inquiry is available on the Essential Services Commission’s website.

In preparing our submission, VCOSS analysed energy price and hardship indicators over the last five years and identified some alarming trends. Since 2010, the rates of wrongful disconnections wrongful has tripled, and disconnection rates overall have doubled even when accounting for population growth (see graph).

 

 

Over the same time, real energy costs have increased by over a third (36 per cent), the level of debt customers have when entering hardship programs has more than doubled, and the proportion of participants who successfully completed hardship programs fell by a third. These data suggest the support offered is increasingly too little and too late for those facing energy hardship.

In our submission, VCOSS made a number of recommendations to the inquiry, including:

• Greater attention needs to be given to energy efficiency problems when helping customers in hardship
• Lump sum payments from customers in hardship should be prohibited as a precondition of reconnection or assistance
• Retailers should treat payments for ongoing usage separately from debt repayments when working with customers in hardship, with debt ‘parked’ until ongoing usage can be managed
• Retailers should have performance targets set on hardship-related indicators, with penalties for not meeting targets
• Retailers should also face penalties for regulatory breaches
• Better data on hardship indicators and program performance needs to be collected so industry performance can be better understood and evaluated
• Hardship programs in particular need to be properly evaluated with independent studies of the actual outcomes for participants.

We also noted that chronic and severe acute hardship cannot solely be addressed by energy retailers’ hardship programs and needs a broader societal approach.

In its release of the Energy Hardship Review draft report in September 2015, the Essential Services Commission has diagnosed significant problems in our retail energy sector. In our media release VCOSS welcomed the general direction of recommendations put forward in the draft report, with the focus on creating better and more consistent outcomes for customers. VCOSS is currently preparing its response to the report, and some further recommendations where VCOSS has concern for some of the initiatives proposed in the draft report, such as prepayment metering and supply capacity restriction for customers in severe hardship who have been reconnected after disconnection.

Energy retailers rethinking their hardship approach

The increased community concern about energy hardship and disconnections has also spurred a number of energy retailers into action. During 2014, the Energy Retailers’ Association of Australia (ERAA) initiated a collaborative project looking at ways retailers and consumer advocates could together improve outcomes for vulnerable customers. This has led to joint advocacy for harmonised national energy concessions, improved retailer approaches to engaging with customers, and greater consistency and simplicity around how information is presented on bills, among other things.

At the same time, a number of retailers have been evaluating and revising their approach to customer hardship. VCOSS has been involved in a community consultative process to inform AGL Energy’s comprehensive renewal of their hardship program and policies, and we have contributed to a similar Origin Energy review.

A few common themes have emerged from this work, which could be considered principles of effective energy hardship response:

• For most customers, payment difficulty is a short or medium term problem and, given the right support, it will pass
• Most customers just need some payment flexibility
• Customers in chronic hardship due to inadequate income or unavoidable high energy usage need significant assistance, and some may never be able to pay their bills and /or repay their debt
• A one-size-fits-all approach is likely to fail – support and assistance needs to be tailored to customers’ circumstances and needs.

Improving energy efficiency for low-income households

Energy affordability for many low-income households is caused or exacerbated by poor quality housing and appliances that together, lead to high usage and high bills. For example:

• Energy retailer AGL reports that the average energy consumption of Victorian customers in its hardship program is 40 per cent higher than its total Victorian customer base.
• Research by the former Department of Sustainability and the Environment found that three quarters of Victorian rental dwellings have insufficient or no ceiling insulation, and over half have insufficient draft proofing. [Footnote: Energy Consult P/L Housing condition/energy performance of rental properties in Victoria, Department of Sustainability and the Environment, 2009.]
• VCOSS members working closely with households in hardship report excessive energy bills in houses that are in very poor condition, or with very old and faulty major appliances (such as fridges that do not seal or heaters with broken fans).

In coming to office in 2014, the Victorian Government guaranteed the Victorian Energy Efficiency Target (VEET) scheme’s immediate future and committed to reviewing its target. VCOSS’ submission to the VEET review recognised the VEET scheme’s primary objective is to reduce greenhouse gas emissions and mitigate climate change, and that this will assist disadvantaged people in Victoria. A low-income energy efficiency program of sufficient scale that complements and works with the VEET scheme is needed, along with other potential new VEET measures to help low-income households improve their energy efficiency. Currently the Victorian Government is developing a range of programs to implement policy goals in its Energy Efficiency and Productivity Statement. VCOSS has been involved in the consultation process, and feel that it is driven by a good understanding of the issues, including difficult ones such as improving the efficiency of private rental dwellings, and financial barriers for low-income households. Whether this is backed by a preparedness to invest significant funds, such as by upgrading 50,000 or so public housing dwellings, or by political capital, such as by regulating the private rental market, remains to be seen.

VCOSS has long called for a minimum quality standard that includes thermal performance for private rental dwellings. We have also long called for new financing mechanisms that meet the needs of low-income households for energy efficiency upgrades, and government investment in retrofit programs and major appliance replacement programs for those who can’t afford it. The fact these are being discussed, along with implementation challenges and possible solutions is potentially the groundwork for future change.

One Million Homes Alliance

VCOSS is part of the One Million Homes Alliance, a coalition of community services and environmental organisations formed to develop policy proposals for improving the thermal performance of Victorian housing stock. An overview of the Alliance’s work is available, and for more detail, documents and issues papers, please see the One Million Homes website.

Network tariff reform

Network tariff reform or cost-reflective tariffs sounds confusing but is important. It is a change in the way energy distribution businesses – the ones who own and operate the poles, wires, and meters – charge for their part in energy supply; about 30-40 per cent of people’s bills in Victoria.

While people are charged according to how much total energy they use over the billing period, the actual distribution costs are driven by the amounts people consume at particular times. Consider two households, the Smiths and the Joneses. The Smiths are a low-income family in a rental home with inefficient appliances and poor insulation. The Joneses are a high-income family who own their home and have efficient appliances and a ducted cooling system. Over summer, they each consume the same amount of energy in one month. The Smiths, with their inefficient appliances, use their electricity steadily over the period, while the Joneses, with their efficient appliances, use less energy most of the time, but a much higher amount for a few hours on a few occasions, when they run their air-conditioning. The high-income Joneses actually cost the distribution network more than the Smiths, but both families pay the same amount as they consume the same amount of total energy. In effect the low-income Smiths are subsidising the high-income Joneses.

The change that’s coming with network tariff reform is aimed to address this. But because network tariffs are only one component of electricity bills, it is hard to know what overall effect the changes will have. If it leads to rising costs for low-income customers, the best response will be good concessions and assistance programs from government, and flexible payment options and compassionate debt management by retailers. And the best preventative measure will continue to be addressing the poor quality housing and appliances that force vulnerable households to use more energy than should be necessary to stay healthy and warm.

The next few months will continue to be a busy period as we respond to the Energy Hardship Review and the ongoing VEET scheme review.

[1] Australian Bureau of Statistics, (2013) 4670.0 – Household Energy Consumption Survey, Australia: Summary of Results, 2012

[2] Australian Bureau of Statistics (2013) 4670.0 – Household Energy Consumption Survey, Australia: Summary of Results, 2012

[3] Reported to stakeholder workshop on Energy Efficiency & Customers in Hardship, 30 April 2015.