Effectiveness of government policy in reducing fuel poverty

A new paper by Paul Simshauser analyses likely consumer impacts of the recent energy crisis and the effectiveness of government policy in reducing the incidence of fuel poverty.

Importantly, opportunities for deeper alleviation of household hardship, particularly through State Government concession policy (income support) are identified. 

This article presents a summary of a recent paper from the University of Cambridge’s Energy Policy Research Group looking at policy interventions arising from the 2022 energy crisis in the NEM.

The 2022 energy crisis

The war in Ukraine and the associated 2022 energy crisis has had far-reaching effects with seaborne prices for coal and gas reaching multiples (5-6x) of their historic averages. While Europe was the epicentre, countries as far away as Australia were impacted. As a major exporter of coal and gas, domestic markets are linked to seaborne prices. Consequently, forward prices for 2023 delivery in Australia’s National Electricity Market surged from ~$48 in 2021 to $156/MWh in 2022 – at one point peaking at $247/MWh. This translated to final tariffs in 2023/24 forecast to rise by ~35%. 

Policy response – federal and state

In late-2022, the Commonwealth Government intervened by setting fuel price caps of $125/t and $12/GJ for coal and gas, respectively. 

Given an estimated market heat rate of ~8.2GJ/MWh, the Commonwealth Government intervention sees forward prices reduced to ~$105/MWh. This seems capable of halving the 2024 tariff increase, from the estimated 35% to ~16.5% by the time a final decision is made in May 2023 (noting the recent draft decision of a 19.8% increase in March 2023). 

On a State-basis, in the case of Queensland two key hardship policies include the electricity concession (an income support) and potentially, universal income support payments. 

All NEM jurisdictions have electricity concession policies. In Queensland, the electricity concession comprises an annual fixed payment of $354 which equates to ~25% of the bill for the average household. Payment occurs on a quarterly basis, meaning $88.50 is credited directly against qualifying household electricity bills each quarter (that is, four payments totaling $354 per annum). 

In addition to the electricity concession, in Queensland, a universal income support (‘ownership dividend’) has been paid to all household customers over the past few years. $50 was paid in the 2020/21 year, and $175 paid in the 2021/22 year. The paper models a further payment of $150 for the 2023/24 year in the post-policy environment (noting no announcement on such a payment has been made by the Queensland or Commonwealth Government at the time of writing).

Household impacts and policy effectiveness

Australian households were initially broadly shielded from the (spot) electricity price dynamics of the 2022 energy crisis because regulated tariff determinations assume a prudent retailer  builds-up a hedge book of forward contracts over a 2- or 3-year period prior to real time . 

However as each year passes, low-cost hedges from prior periods (i.e. pre-2022 energy crisis conditions) are assumed to be replaced by hedges in current market conditions, translating to increased prices.

Forecasting near-term future impacts on households, particularly bill affordability and fuel poverty  is needed, especially given the energy crisis exists in a backdrop of rising interest rates and sharply higher consumer price inflation. 

Fuel poverty is the inability to afford a socially and materially necessary level of energy supply and is prevalent in Australia. Fuel poverty is complex and driven by multiple factors.  As an essential service, energy affordability and the effective alleviation of household fuel poverty is a priority.

Before any policy intervention, in 2021/22 an estimated 132,000 households (353,000 persons) were experiencing underlying  (pre-policy) fuel poverty in Queensland. Modelling  finds this underlying pre-policy level virtually doubling from 6.3% to 12.1% of households in 2023/24. That represents an estimated 13.9% of the population, 721,000 persons. 

Analysis of the cumulative effect of Commonwealth and State-level policies on fuel poverty finds these policies have a significant impact with the population defined as fuel poor reducing from an underlying rate of 13.9% to a post-policy rate of 6.7% or an estimated 346,000 persons. Of this, Queensland’s State-level hardship policies making the larger (3.2 percentage point) contribution to this result.

Future hardship policy

Effective Government hardship policy remains vital to alleviate rising fuel poverty in Australia.

Universal payments clearly assist households (reducing fuel poverty by -0.5ppt as modelled in the paper) but when the same program budget is re-purposed to a targeted policy framework such as the electricity concession, there is greater effectiveness of the policy in reducing the incidence of fuel poverty.  

Critically, electricity concessions are highly targeted and applied directly against household electricity bills as a credit. The natural fiscal limits of state government balance sheets also means that targeting is important. 

However, while the economics of such a decision is unambiguous, the politics is not straightforward. Energy economists must be ever mindful of the broader macroeconomic implications of rising interest rates and broader consumer price inflation – all of which place strain over a wider array of households, beyond those defined as fuel poor. In this regard, even some element of universal payment (i.e. a mix of universal and targeted payments) enhance social welfare given exclusion error and deteriorating household real equivalised incomes after housing costs. 

Governments need to deploy a complementary mix of policy measures across price, quantity and income energy policy levers to optimally deliver the necessary supports and outcomes for households

“The 2022 Energy Crisis: Horizontal and Vertical Impacts of Policy Interventions in Australia's National Electricity Market", published by the University of Cambridge’s Energy Policy Research Group.

You can find the full text here.