Fuel Poverty in Hungary: an initial assessment


Though fuel poverty (i.e., the inability to afford adequate energy services for the household) is a concept to be framed in more general considerations about poverty and deprivation, there are several reasons to detach it from the common struggle of families to make ends meet. Some key distinctive features of this phenomenon as identified in the literature are:

Unlike other goods and services1, the purchase of energy is, to a certain extent, not an option for households. In Hungary as in any other temperate countries, a minimum amount of heating is compulsory in winter. As energy use is normally income inelastic, lower income households will experience disproportionately higher heating expenses (Brofy et al., 1999).
However, not all low income households are fuel poor and there are fuel poor households that do not belong to the lowest income percentiles (Waddams Price et al., 2006). This indicates a more complex interaction between low income and residential energy inefficiency (Morrison and Shortt, 2008).

Consequently, there are solutions other than increasing or supporting the households’ income or subsidizing energy prices, namely improving the energy performance of dwellings, appliances and equipment. It is eventually possible to bring households out of fuel poverty while keeping or reducing their energy consumption (Milne and Boardman, 2000). This touches upon related issues like GHG emissions reduction or reducing energy dependency.
In addition to that, there is evidence showing that inadequate indoor temperatures increase excess winter mortality rates (The Eurowinter Group, 1997) and are connected to certain diseases (Morrison and Shortt, 2008; Roberts, 2008), with more intense impacts on vulnerable populations like elders (Howieson, 2005) and children (de Garbino, 2004). It is likely that fuel-poor households are not fully aware of the health risks of suffering low in-house temperatures.

Fuel poverty is gaining priority in the political and research agendas, but it is far from being a common issue of concern. Few countries, namely New Zealand, Ireland and, above all, the UK, are front-runners in the fight against fuel poverty.

Although society and institutions are aware of and concerned about general energy affordability problems, Hungary, as many other EU Member States, lacks any official definition of fuel poverty. Given its geographical location (continental climate with cold winters), very significant imported gas-dependency, socio-economic conditions (income per capita well below Western Europe standards, the second lowest employment rate of the EU, rising energy prices) and the presence of an increasingly energy inefficient residential stock relying to a large extent on natural gas, it is reasonable to foresee that a sizeable share of Hungarian households are struggling to pay for the energy (mostly heating) they need. Previous research (Kocsis, 2004; Autonómia Alapítvány, 2004; KSH, 2004; KSH, 2006; Fülop, 2009) has highlighted some aspects of the issue in Hungary from various perspectives and at different scales but, to our knowledge, this is the first comprehensive assessment of fuel poverty at a national level.

In Hungary – as practically in any country but the UK – there is not systematic collection of statistics aimed at estimating the incidence of fuel poverty. However, data recorded for more general purposes allow producing meaningful figures that illustrate the extent and key aspects of the phenomenon:

Measured in purchasing power parity units (PPPs), Hungarian consumers currently (as of the second half of 2008) face middle to high range gas prices and the highest electricity prices of the EU. Between 2000 and 2007, energy prices increased at a faster rate than any other Consumer Price Index (CPI) item and approximately as much as wages and pensions grew. Particularly strong price rises were registered for gas and DH between 2006 and 2008.
The average per square meter energy consumption of the Hungarian household was among the highest ten countries among EU27 countries. Also, according to the ODEX energy efficiency index for households, Hungary was the only EU Member State whose residential sector became more energy inefficient in the period 2000/07.

Expenditure-based measures of fuel poverty based on KSH data indicate that, on average, Hungarian households allocated 9.7% of their income on energy expenses in the period 2000-2007. If the 10% threshold currently in use in the UK is applied to Hungarian data (year 2007), the average household of all but the two highest income deciles would be defined as fuel poor.

Self-reported measures of fuel poverty following the consensual approach (Healy, 2004) and based on EU SILC data show that, on average for the period 2005/07, a 14.7% of the Hungarian population was unable to afford enough heat for their homes, a 16.7% was in arrears on utility bills and a 26.3% was living in a house with bad fuel-poverty related house-maintenance conditions (leaking roof, damp floor and walls, rotten windows, etc.). Some trends suggest that households may have initially reacted to the 2006 gas and DH price shock by delaying their payment of utility bills rather than by cutting energy expenses.
EU SILC results for the indicator ‘Inability to keep the home adequately warm’ were selected for producing a first estimate of the number of fuel-poor people in Hungary. According to them, nearly 1.5 million inhabitants reported being in such condition every year (as an average for the period 2005/07). Following the findings by Healy (2004) for Western Europe, it is believed that estimates based on the consensual approach (such as this) are more conservative, but more reliable, than expenditure-based measures.

Figures on excess winter mortality (EWM) estimated following state-of-the-art EWM calculation methodologies (Johnson and Griffith, 2003; Healy, 2004) indicate that for the period 1995–2007, an average of 5,566 people died more in winter (i.e., December to March) that in non-winter (i.e., August to November and April to July) season. This equals to a relative excess winter mortality figure of 12.71% (more people dying in winter than in non-winter periods), which is below the average of relative EWM for 14 Western European countries in the period 1988-1997 as estimated by Healy (2004). Some initial, rough estimates indicate that, in Hungary, between 1,400 and 2,400 people (between 25% and 44% of all EWD) die prematurely every year because of poor housing and living conditions related to fuel poverty. It is also know that fuel poverty has morbidity impacts, but no data for Hungary were collected in the context of this research.

Fuel poverty in rural areas is likely to be a particularly underexplored and complex typology of energy deprivation. Severe cases of fuel poverty experienced by Roma families living in geographically remote rural areas where very few income earning opportunities exist have been detected. In these cases, households do not consider fuel poverty as a detached problem from the broad livelihood struggle, but rather as one more piece of a complex deprivation puzzle in which energy is one of the multiple priorities (food, transport, shelter, health, etc.) to be satisfied by the household’s restricted income. For these families, electricity and firewood theft are part of the strategies to secure energy supply in winter months. In this respect, it has been noted the effect the impact on firewood prices of enhanced wood extraction for renewable (biomass) energy generation and its connection with illegal wood collection by poor households (OECD, 2008). This provides a certain ground for a collateral discussion about the social impact of renewables and on the potential of forests to act as locally managed fuel sources for deprived rural households.

Particular attention has been paid in this research to district heating (DH) because of the heavy burden it poses on the budget of low and middle-income households living in the suburban areas of Hungary’s largest cities supplied by DH plants. It is probable that, among the 650,000 Hungarian households connected to DH, many lower-income families are trapped in dwellings that cannot be disconnected and have to carry on paying painful energy bills without any clear perspective of improvement. In a way, this typology defies common definitions and indicators of fuel poverty because households do have access to adequate energy services, although at disproportionately high costs. However, as the Danish experience (Odegaard, 2009) indicates, DH as combined heat and power (CHP) has a significant potential to provide affordable energy to households while improving the efficiency and reducing the GHG emissions a country’s energy system as it allows using the waste heat of power plants for supply with heat to the residential sector and substituting fossil fuels by biomass.

Elderly people are a social segment particularly sensitive to fuel poverty because they spend more time at home, often live in pairs or alone in underoccupied dwellings and are less flexible to change their place of residence or to make significant investments in improving their dwelling. There is also evidence indicating that they tend to react to energy affordability problems by switching off the heating rather than by delaying payments. Finally, for the period 1995-2007, excess winter deaths were recorded only among people over 40 years old and the probability of becoming an excess winter death was ten times bigger among people of 60 years and above than in the 40 to 59 year age group

However, the burden of fuel poverty is not only borne by households, but also puts additional pressure on utility companies: according to EUROSTAT, Hungary had the highest percentage of people with arrears on utility bills of all EU27 countries in 2007. This has an impact on the functioning of utility companies, which have incentives to reduce debts and non-payments to avoid costs related to the management of such cases and to improve their general operation. Local governments also are part of the picture as the social services mediate to avoid disconnection and support those households willing to get rid of utility services (energy and other)

The relationship between income poverty, energy supply, domestic energy efficiency and the role of institutions is complex and multi-faceted. While price increases have clear welfare impacts (e.g., the additional money spent on energy means less consumption of other goods and services and/or less savings, that is, future consumption), they also provide incentives for improving energy efficiency. Such reaction will not take place immediately and it is probably influenced by a number of factors: cost of the improvements, expectations about the evolution of prices in the middle to long-term, availability of technology and expertise, information about feasible alternatives, costs and expected savings, capacity of the households to afford the initial investment, availability of credit, etc. Precisely because some of these factors can act as barriers, and although investing in energy efficiency is often a decision at the household level, the involvement of institutions is needed to provide the adequate context and mechanisms that increase the likelihood of such investments. At the same time, households unable to escape from fuel poverty will need some kind of state support to secure the access to a minimum amount of energy services.

For Hungary, this translates into a series of critical recommendations concerning mostly to the responsibility of the government:
There is a need to move from measures (income transfers) with short term effects that help households afford energy consumption, avoid disconnection or compensate increases in energy prices towards investing in domestic energy efficiency, which offers a long-term solution to fuel poverty and has other positive welfare effects in terms of co-benefits for individual households and the society. For that, the current structure of subsidies to gas and DH prices, which distorts the market, sends a wrong signal to consumers, provides little incentives to invest in domestic energy efficiency and is an additional burden on the government budget, needs to be replaced by measures better targeted at the households in a more difficult situation (OCED/IEA, 2007; Fülop, 2009). Then, many more resources would have to be directed to programmes aimed at improving the energy performance of Hungary’s residential sector as way to reduce fuel poverty, cut emissions and reduce energy dependency. In this regard, two market failures acting as barriers identified in the literature (Healy, 2004) – the information gap and poor access to credit by low income households – would be a matter of primary concern.

Though small scale initiatives are useful to explore the potential of feasible improvements (e.g., the SOLANOVA project achieved 80 to 90% reductions in the annual space heat consumption of a conventional panel building in Dunaújvaros), the government’s involvement is needed for extensive (country-wide) energy efficiency programmes that require large initial investments and long implementation periods.

Following IEA’s recommendations (OECD/IEA, 2007), it is also suggested: i) a careful assessment of the strategy to enhance Hungary’s energy security through large infrastructure developments (i.e., strategic gas storage and ‘Nabucco’ pipeline) that may have negative impacts in future gas prices and diverts financial resources otherwise needed for domestic energy efficiency; ii) to consider a reduction in the subsidies to the renewable and CHP sectors, which increase electricity tariffs, in order to avoid oversubsidisation and enhance energy and economic efficiency.

Lastly, it is also advisable to devise mechanisms for measuring the various aspects and welfare impacts of fuel poverty in Hungary (from energy prices to excess winter mortality) either through specific data collection tools (like in the UK) or through the expansion of the existing capacities (e.g., KSH survey on households’ financial and living conditions). For that, a combination of expenditure-based measures and indicators based on the consensual approach adapted to the Hungarian reality (e.g., lack of access to the natural gas grid, absence of individual meters, connection rates to inefficient DH systems, recurrent energy bills payment arrears and mounting debts, reliance on State housing for winter months, etc.) is suggested.

These suggestions point to the urgent need to move from supply-side approaches based on consumption of energy (e.g., kWh of electricity, m3 of natural gas, GJ of DH, etc.) to demand-side solutions focused on the provision of energy services (e.g., ensuring thermal comfort, covering lighting requirements, etc.). They are consistent with more general developments in the climate and energy policy areas that follow the mounting evidence on the effects of climate change and the increasing concerns about energy security. In the transition to a low-carbon, more energy-secure economy, those goals need to be made compatible with the aim of an affordable access to adequate energy services for all citizens.

(This is an extract from the report entitled 'Energy Poverty in Hungary: an initial assessment. The whole document can be downloaded from the attachment or ordered in printed form from iroda@vedegylet.hu)
Sergio Tirado Herrero
Prof. Diana Ürge-Vorsatz
Prepared for:
VÉDEGYLET – Protect the Future

Fuel poverty in Hungary_DRAFT2.doc2.18 MB
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